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Edited Transcript of GAIA earnings conference call or presentation 6-Aug-18 8:30pm GMT

Q2 2018 Gaia Inc Earnings Call

LOUISVILLE Aug 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Gaia Inc earnings conference call or presentation Monday, August 6, 2018 at 8:30:00pm 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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* Dillon Griffin Heslin

Roth Capital Partners, LLC, Research Division - Research Associate

* 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

* 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 Second Quarter Ended June 30, 2018. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell.

Following some prepared remarks, we'll open the call for your questions. Before we get started, however, I'd 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 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 like to turn the call over to Gaia's CEO, Jirka Rysavy. Please go ahead, sir.

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

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Thank you, Justin, and good afternoon, everyone. So our second quarter results ended again ahead of our expectations. Subscribers grew 68% to 466,000 from 277,800 a year ago. This puts us ahead of the growth rate needed for us to reach our next target of 1 million subscribers by end of the next year. While we invested during the quarter about $1 million less than we budgeted in our member marketing plan, this was partly helped by increasing number of members joining us by organic means. Our member acquisition coming from organic channel was up again during the quarter and is now solidly over 40%.

Streaming revenue increased 65% compared to same quarter last year. The revenue and subscriber growth rates from now should be comparable going forward. Gross margin grew 70 basis point to 86.8%, and we expect to maintain this level of gross margin for the rest of the year.

By focusing on content merchandising over the last few months, we diversified the viewing of our titles or no title now represents more than 0.6% of total viewing. About 8,000 titles are viewed every single month, which no group of titles such a series of collection representing the primary viewing for more than 2% to 3% of our members. We also expanded our geographical reach to over now 180 countries.

We received the permit, which somebody asked last time in our call, and we started our preparations streaming for our streaming event center, which we plan to launch our premium level subscription at about $300 annually probably sometimes next year. We will provide you an update about this premium subscription during our next call. And we expect to hit our half a million milestone, which is 500,000 members somewhere in mid-September.

And Paul will speak to you now about the quarter. Paul?

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

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Thanks, Jirka. Streaming revenues in the second quarter increased 65% to $10 million compared to the year-ago quarter due to continued strong subscriber growth. Gross profit in the second quarter increased 61% to $9.1 million compared to $5.6 million in the year-ago quarter. Gross margin increased 70 basis points to 86.8% from 86.1% in the second quarter last year. The increase in gross margin has continued to be driven by increased revenues and continued efficiency in our per subscriber costs of streaming and content. As Jirka mentioned, we expect to maintain our gross margins at this level through 2018. Total operating expenses in the second quarter were $15.6 million compared to $12 million in the year-ago quarter. Most of the increase was driven by increase spending on customer acquisition costs to support higher growth rates. Our customer acquisition cost as a percentage of streaming revenues was 85% during the second quarter of 2018 despite the increase in the volume of subscribers added. This is down from 99% in the year ago quarter and below the 95% to 105% of streaming revenue target, we established on our May conference call. This was due primarily to continued efficiencies in our marketing efforts, and continued increases in the organic contribution.

As a reminder, we include all marketing expenses in these numbers, including the cost of translating our existing library and launching our foreign language offerings. While we perform favorably against the spend target in the second quarter, I would like to reaffirm that we will be targeting investing 95% to 105% of streaming revenues in the subscriber acquisition efforts for the remainder of 2018, while maintaining our discipline of not spending more than 50% of lifetime value. With this investment rate, as Jirka mentioned, we are projected to reach our next major subscriber milestone of 0.5 million subscribers in mid-September 2018. On our way to $1 million by the end of 2019.

The overall net loss in the second quarter was $6.3 million or $0.35 per share compared to a net loss of $6.3 million or $0.42 per share in the year ago quarter.

As of June 30, 2018, we had $41.2 million in cash, our real estate valued at roughly $30 million and undrawn line of credit for $13 million.

With that, I would like to now open the call up to questions. Justin?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question today comes from Mark Argento with Lake Street Markets.

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

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I had a couple of questions around the organic growth sub-acquisition here, which is obviously very solid in the quarter. Could you talk a little bit about where you're seeing those subs? Where they're coming from? Is it word of mouth in kind of how you track them? And then in particular the overall -- if you could drill down a little bit on what you spent for customer acquisition in the quarter, that would be helpful?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [3]

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Yes, I would take the first one. You can take the other. So on organic, yes, that was very positive news for us. We can talk about last time, because we first time get to about 40% from mid-30s. Now, all the months in the quarter were ahead to 40% between like 42% and 40-above that. And so was very nice for us because, obviously, that's what helped, through spending less. Because we budgeted to have to buy a little more than we actually did, and we hope that trend will continue, but we obviously -- it depends how there's always little factors. But it was very nice quarter. We kind of tried to do several things in marketing like, for example, if you focus like more in bundles, especially, in June like a spending more money in a certain -- the marketing efforts. And -- but I think the organics there are 2 main source, which kind of helping. One is kind of what we start to call member referral. And you're going to probably hear from us a lot about it next year as we're already putting a lot of effort, what you call member referral. We have something -- we extended to like a 7 days to play -- pay for -- I mean, basically, we call it member watch free or friends watch free. So you are a member, you can gift somebody a video and they have like 7 days to watch it. So that was one of the factors. We also -- it's always a quarter when we focused more on e-mail, because it's a slow quarter. And so those were probably the biggest factors. But I think as we go to next year, this member referral, you'll hear more about from us. Paul, for the second?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [4]

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Yes, sure, in terms of the CPA per sub. All those factors contributed to reducing that rate down from the mid-80s to the low-80s for Q2.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets & Senior Research Analyst [5]

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And then on the general trend anecdotes in terms of churn, and the stickiness of the cost more lifetime value?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [6]

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I don't think there is really meaningful changes in the second quarter. I think we pretty much stay with it. There's no -- I don't think it was either direction. But it's like in a second quarter, if you kind of start fundamentally improving the trends, it's typically the fourth or first quarter when you see the big move, the second and third, which will be similar for Netflix. You see the kind of maintaining the trade, it's good. You don't expect big improvements on that because just more people outside and stuff like that. So we have -- the fact that I talk about merchandising that when we kind of started this business, and kind of look at the Netflix statistics and they said there's no title more than 1% and no growth more than 3% vis-à-vis should get there 1 day, and we're already there. So our highest title, it's like 0.6. And most -- I mean, if you go to title #5, it's like more 0.2. And there is no group more than 3% either. So kind of looks like the general streaming mechanism works with Netflix, works at Gaia now too.

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Operator [7]

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And next will be Steven Frankel with Dougherty.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [8]

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I noticed at the end of June you held a live streaming event on the Yoga side. Maybe, could you tell us what you learned from that? And what are other kind of innovative offerings might you have in the next quarter or 2?

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

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Steve, this is Paul, I'll take that one. So we're always testing and iterating on ideas to increase engagement in the Yoga population as one where we're always looking at ways to engage them as you can imagine coming off of strong Q1 Yoga performance, what we're looking at is trying to engage and motivate those people that joined us in January. So that's really what that test was designed to do to create a more personal connection to our host. It was a pretty small test in terms of the number of people that we reached out to. We primarily just wanted to test the mechanisms of being able to do it, and I think it was an overwhelming success from that perspective. And we'll be leveraging that test for other tests going into the back half of the year on other populations. But we don't really have a calendar that we are publishing around that. It's more about a team by team basis of identifying things that they want to test and then having the mechanisms to be able to do it, to see what the impacts are.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [10]

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Okay and congratulations on the strong organic traffic and the increase in international penetration. Could you update us on your thought process around ramping up foreign language content? And maybe actively marketing to selective international markets?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [11]

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For right now, international, it's mostly organic. And we -- as we kind of said couple times to you already, we don't really have a big plan to focus in international until we hit 1 million subscribers. As of, kind of, issue as a part of the million, we obviously doing it and so we -- if you, kind of, watch our international, we, kind of, switch and start to take a lot of different currency. Paul can maybe talk about what we take now.

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [12]

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Yes, we're up to 6 currencies today with another 6 coming by the end of the year.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [13]

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So those are kind of the prepping, the marketing for international. I think we would start somewhat next year, but it's still not going to be a big reliance on international. I think you're going to start to hear more about, what we call, the member referral. We all go -- probably also next year you're going to have some or, what we call, the premium subscription, which estimated about $300. We didn't decide the timing on it yet, but we did some test with our members, and it's very good feedback. But we will provide a little more next year, which will be more impacting the average -- the ARPU than would be a number of subscribers. But we would go -- internationally, we're starting right now on marketing based on the country with, what we call, lower -- higher conversion rate, which are -- would be like New Zealand, Australia, for example, Germany start to be very promising, Scandinavia. So we do a lot of testing and establishing, which countries are the best to market, when we going to hit it. But it's -- international will be more for 2020. But we will start to probably talk to you about some in next calls, what's the percentage, because we actually did see slight international uptick as a percentage of overall members. But -- which -- it's kind of promising, but it's not yet significant to really talk about it as a plan.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [14]

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Okay. And then, Paul, could you update us on what cash flow and free cash flow was in the quarter?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [15]

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The Qs are going to be published this afternoon, which we'll have all those details in there.

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Operator [16]

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And next will be Eric Wold with B. Riley.

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

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A few questions. One is a follow-up on the comments around the multi-year organic growth and kind of the referral program you've got where your members can share videos with someone else, kind of, entice them to come over. How can that morph into more in a official referral program where kind of somewhat compensate members who are kind of drive in people over and kind of have an incentive for them to do that? Do you see that as an opportunity to really accelerate that member referral program? Are you going to move towards something like that?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [18]

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Yes, well, there is really 2 questions in it. My answer is probably yes, on both in different manner. So the first, the member referral, it's -- I don't expect that will be a monetary compensation. Even we will offer it. We have, what's called, an ambassador program, which are for people who refer multiple members. So people can join the ambassador program and refer for -- and then we pay them, that's a, kind of, actually part of division, what we call, sales, and what's actually going to report to Paul right now, and we're going to quite focus on that one.

The member referral, it's for people who would refer 1 to 10 members. And there would be some benefits, but I don't think there would be really monetary as we're looking for thousands of people. And yes, there would be like some monetary benefits but not necessarily money, we still didn't -- we tried right now, few of them. So we kind of test what we'll have the best way as we launch. But that's probably from anything what we're talking, we want to really get there very solid as we kind of get closer to our 1 million members. Because that is one of the significance there, because we're going to have and more mature members. And their member referral is the best way how to harness that power. And as we also launched some aspects of, what we call, community for this member interaction.

But, I would say, going over next 2 to 3 years, that would be the key part of member referral and to -- what we call community aspects of the marketing, because it's -- originally we thought it would be more like a [retention] but now we see that the marketing, and getting new members is actually very good aspect of that undertaking.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [19]

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Okay. And then, maybe for Paul, I know, it's not an exact figure, it's just kind of a simple average in the quarter. But look at kind of simple average to get to kind of monthly revenue for sub, dipped in the quarter year-over-year and quarter-to-quarter. Were you back-weighted in the quarter in terms of subscriber additions? Maybe more in $0.99 program, do you think that was kind of the cadence of the marketing more in June than the other months?

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Paul C. Tarell, Gaia, Inc. - CFO & Secretary [20]

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Yes, i mean, you hit it spot on right there. So it's really -- last year, we were focusing on bringing in members earlier in the quarter to offset that. And this year, one of the test that we were looking at doing was what's available in June so that we could use that for our July through August planning exercise. So that's exactly what happened in this quarter. It was more back-weight than normal.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [21]

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And also we tried to, because we kind of saw that if we kind of do it early in the quarter, and you guys, analysts, when you kind of analyze it then you get ahead with revenue compared to members. And we saw -- when we saw people publishing that, "Hey, this is maybe not best way to do it," because then the revenue -- while we hit members, the revenue can stay behind, because the $0.99 is a big number as a percentage of quarterly revenue, if you take it 1 month of $0.99. So we try to, right now, do it in such a way that the revenue and -- revenue growth and member growth will be likely same percentage. So you have a good guidance, how to budget your revenue, compare guidance because it did not work if we skewed it upfront. So we try to make it more predictable, because, we don't want to kind of get our targets and stay behind the analyst revenues.

We always staying focus on the members right now, there are still a lot going forward. I think revenue on earnings will be key parts. So I would just -- we want to establish the way how we doing, so it's predictable. I think the predictability, it's probably the key things what we're striving here.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [22]

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Okay, and final question for me. So obviously, your budgeting 95% to 105% spend, and you went to 85%, and you made a decision to kind of harvest that cash and not spend it and kind of stay below that. As you look in the back half of the year, if you end up being below that 95% to 105% again, what's the decision process behind either staying below that and kind of harvest it? Or would you kind of accelerate spend to get into that range to bring in those subscriber early? What's the decision between the 2?

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

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I think for us, it's really a question how much organics -- how the organic is going to act. Because that's probably the delta what you're looking for. I think we want to really be stable. We don't really expect to accelerate everything. We have right now, if you look at what we need to be between now and then, it's about 85% growth. So it will be -- sorry, 65% growth rate for subscribers. And so for that, on revenue, we want to stay relatively predictable with understanding second and third quarter are typically slower. And if you look at Netflix, they do it and they have the same issue. And last time, when you provide too high guidance and you miss it for a little bit, which is sometimes a function -- would happen to Netflix, we want to avoid that. So right now, we're pretty stable, but understanding the second and third is always will be a little slower and fourth and first will be little maybe higher, but generally, we tried to be pretty predictable. And as we kind of said that we would hit million right middle of September, we can't actually give you to date. But -- and then so hitting the 1 million subscriber next year don't look over certain -- over performance on subscribers. If anything, we save some money.

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Operator [24]

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And next will be Darren Aftahi with Roth Capital Partners.

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Dillon Griffin Heslin, Roth Capital Partners, LLC, Research Division - Research Associate [25]

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This is Dillon on for Darren. I was wondering if you could talk a little bit about some of the dynamics of the subscribers you added during the quarter? If you saw any trends in those new subs attracted to a certain type of content or one of the 3 main channels?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [26]

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We have -- it's obviously seasonal. First quarter, lot of subscribers would come from Yoga. Second quarter, a lot of -- most of the subscriber -- I mean, I'm talking as a percentage. So first quarter, the Yoga will dominate, second quarter, what we call, seekers, Seeking Truth will dominate. So there's definitely a shift from Yoga to Seekers in second quarter as probably, by far, fastest growing quarter and second quarter was the Seekers.

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Dillon Griffin Heslin, Roth Capital Partners, LLC, Research Division - Research Associate [27]

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Got it. And then related to any potential price increases? Do you have any sort of outlook as to what would need to happen first? Does it depend more on how quickly you can grow above a million subscribers or gaining a greater percentage of international penetration? Just sort of curious about your thoughts there?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [28]

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Well, the internationally right now, we would charge like EUR 10, like in Germany. So you can say that somewhat price increase about -- there's about 15% difference. And all international market, they -- at par or mostly they're higher in the U.S., so it's kind of obviously part of the testing and with this, we probably do some of the testing. But don't expect any meaningful price increases before we hit million members. However, we would talk about it mid of next year and -- but we don't expect to change the basic price. We might have some offerings, which will be higher, like I talked about, the premium subscription, which will be 3x the current price. And that probably will be launched somewhere during next year. But it doesn't mean we will change the price to our basis until we hit million members.

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Dillon Griffin Heslin, Roth Capital Partners, LLC, Research Division - Research Associate [29]

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Got it. And then last one for me around premium. I think you mentioned, you've tested it with some of your subscribers a little bit. Is that how you plan to roll it out as well in sort of segments? Or is it just going to -- once it's live, it's going to be live to all of them?

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [30]

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We didn't tested it. We kind of did like a, questions, how we...

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

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Survey.

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

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Survey. So we've -- once we -- whenever it's live, it will be available for everybody and we would expect there will be more upgrades of existing members than new members coming to it. However, because it brings, for the event space, we bring some new names, so there's probably also a little acquisition left, but we don't -- we aren't planning on that. So I think it's more ARPU. It's basically, you look at that, if you have -- in that you would have on the top of the regular service, you would also have streaming of those weekend events, what you can see live with multilingual simultaneous translation all over the world.

We tested couple of times last year and was kind of surprisingly good, we received some of the revenue from events. The streaming was on like $400,000 and $500,000. So it's a -- it would be a lot of testing, but, however, I will believe, it's the future and we really investing into preparing the streaming, especially the international translations. Because last time, 80% of the streaming came from international -- and 80% of the streaming revenue came from international markets.

So we will talk more about next quarter about this. But since last quarter, somebody volunteered to -- he applied for a permit in locally to get -- to build the event space in our campus, so we're providing the update on it today. But really, I think, by the third quarter, we would have an update and to talk -- give you some specifics, you can put in the plan. I would suggest not to do much until we kind of give you some specifics. So we don't give any...

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Operator [33]

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And at this time, this concludes our question-and-answer session. I'll now turn the call back over to Mr. Rysavy for closing remarks.

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Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [34]

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Thank you, Justin, and thank everyone, for joining, and we look forward to speak with you when we report our next quarter, which will be in early November. Thank you very much.

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Operator [35]

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Well, thank you. And ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.