U.S. markets close in 1 hour 2 minutes

Edited Transcript of GAIA earnings conference call or presentation 27-Apr-20 8:30pm GMT

Q1 2020 Gaia Inc Earnings Call

LOUISVILLE May 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Gaia Inc earnings conference call or presentation Monday, April 27, 2020 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 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

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

Presentation

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

Operator [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, 2020.

Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell. Following some prepared remarks, we will open the call for 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 the 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, and good afternoon, everyone.

So revenue for the first quarter increased 16% to $14.5 million, affected about $0.5 million by cancellation of the live streaming events. We ended the quarter with 605,000 members, slightly above expectation, even after absorbing the impact of our price increases earlier in the quarter. As a result of the state of homeowners in late March, we see an uptick in the new member growth. It continued in April. So as of today, we already have over 625,000 members.

During the quarter, we generated a gain, not only the positive EBITDA -- adjusted EBITDA as planned, which was an improvement over $4 million, but also generated $2 million in the cash flow from operation, also $6.7 million improvement. Cash used during the quarter was reduced 80% or $6.5 million, to about $1.5 million, and we ended the quarter with $10 million in cash. We fully expect to reach our key milestone of positive earnings and free cash flow in July as planned and communicated about 15 months ago.

We are even more confident because of the current uptick in the member growth and the continuing decrease of our member acquisition cost as well as our first quarter, 22% improvement in our gross profit per employee to now 382,000.

And Paul will talk to you more about the quarter. So go ahead, Paul.

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

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

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

Revenues in the first quarter increased 16% to $14.5 million compared to the year ago quarter. Gross profit in the first quarter also increased 16% to $12.6 million, from $10.9 million in the year ago quarter, with a slight decrease in gross margins to 86.9% compared to 87.2% in the year ago quarter, but this is in line with the fourth quarter of 2019. We expect to maintain this margin level through 2020.

During the quarter, we finalized and implemented price increases with all new monthly members and all annual numbers at the new pricing levels. We elected to honor legacy monthly pricing of $9.95 for approximately 95,000 monthly members that joined prior to January 2019. We ended the quarter with 605,100 members, which reflects the loss of approximately 20,000 members during the quarter who declined to renew at the new price levels. These member losses were offset by increased interest in Gaia and our unique content offering, coinciding with the stay-at-home orders that began in mid-March. The member count and revenues for Q1 do not show the impact of this momentum as people who signed up in the final week of the quarter did not have the opportunity to convert to paying members until early April. The increased interest has continued through April, and as Jirka mentioned, we are now over 625,000 members, with momentum continuing to be in our favor.

Selling and operating expenses, excluding marketing and member acquisition costs in the first quarter were $6.9 million or 47% of revenues. Corporate and G&A expenses in the first quarter were $1.4 million or 10% of revenues. Our focus on continued operating efficiency and expense rationalization over the last 15 months has been successful. Our gross profit per employee has increased to $382,000, up from $322,000 in the year ago quarter. We intend to continue growing revenues and gross profit during the rest of the year with minimal increases in headcount.

Total member acquisition costs were $7.6 million or 52% of revenues, which is down from $8.5 million or 68% of revenues in the year ago quarter. I'm happy to report that our organic growth initiatives, including referrals from our existing members, are continuing to gain traction, which combined with reduced rates on advertising inventory during the second half of March, allowed us to improve our average CPA for the quarter down to $68 from $82 in the year ago quarter. More importantly, with the annual plan selection continuing in the 28% to 30% range for new signups, we have significantly improved the cash conversion cycle on our customer acquisition efforts, reducing repayment time down to 3 to 4 months for each monthly cohort.

We had another quarter of positive adjusted EBITDA margins and cash flows from operations as planned, both of which were significantly improved from the year ago quarter.

We've also improved overall cash used during the quarter to $1.5 million. This brings total cash used in the prior 6 months down to $1.6 million, an improvement of $19.4 million or 93% from the comparable period a year ago.

With our cash balance of $10 million, our current member count, continued improvements in retention as we mature our member base's average tenure and ongoing efforts to continue to scale organic growth initiatives, we are confident in our ability to get to free cash flows and positive earnings beginning this July.

Second quarter is off to a great start for Gaia. More and more people are seeking out our content during this challenging time, bringing awareness of our brand and its benefits to a wider audience. Our path to free cash flow in July is tracking better than our plan, and we look forward to our next update in early August when we report our second quarter results.

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

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question comes from Darren Aftahi of Roth Capital Partners.

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

Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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

First, just a clarification. Jirka, did you say there was an impact from live streaming events on revenue, did I hear that correctly?

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

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

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

This is Paul, I'll answer that. Yes. So we had to cancel 2 of our events that we had scheduled for March because of the Colorado stay-at-home orders that were put in place.

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

Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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

Got it. So just on that vein, more perhaps just -- I understand it's live. But just on the topic of content, you heard a little bit about it from Netflix as well. Just how are you guys thinking about content production, live events, if the current world we live in kind of drags on longer than maybe people imagine?

And then second question, when you say people are attracted to your platform, I'm just kind of curious. I understand what's driving it, but obviously, there's a myriad of things. There's yoga, there's wellness, there's mental health. So are there any specific topics in particular, maybe top 3 that people are really driving? And then are any of your partners doing anything that's helping kind of exposure? And is this something where if you look at the trend line of, let's say, mid-March to kind of where we are right now, has that peaked? Or is it plateauing and is still kind of strong?

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

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [5]

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

Okay. Well, I will split it. I'll answer the first one about the events and content. So the events, they impact revenue, but not really bottom line. They're not really designed to make money. They kind of pay for themselves, but they're not really -- they're kind of neutral. But it's definitely hit the revenue. We canceled events. It was really 2, and the last 1 was already in it. So impact to revenue about $0.5 million. And as we kind of move them to second part of the year, so we see when it's open, but we have plenty of momentum from the subscriptions or regardless that the revenue shortfall will be made up by the extra members.

So on the content side, we don't really have those problems Netflix does. Because we do everything in-house, 100%. So we don't have the problem. And also, we own the facilities, and so we didn't have the issues like what you hear from Netflix and all. If there's any impact, we'll be more like -- if guests need to travel here and that kind of stuff, so we open several now series where we do from stuff what we have. So we don't have an impact so far. We don't really plan to have those issues what Netflix has.

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

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [6]

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

Yes. I'll finish up that, and then I'll jump into your second multipart question. The reality is, is that January and February, we ended filming a lot of our content on our recurring shows anyway. So we were pretty well positioned to be able to go through this for the next couple of months without a blip. What we have been able to do is use some of the excess editor time to actually go back to some of our library content, think about how do we resurface some of those topics to our much larger and newer member base that we've added over the last 12 to 18 months. So it's actually been a pretty good opportunity for us to test some of the things that we talked about during historically and just hadn't had time. So there is no real impact on the content side for us even if this persists through the summer. So now on...

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

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [7]

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

We had -- last year, we added a lot of the new content for the -- our live streaming. So we did it with each of those people who were -- the serialized streaming, a 13 season -- 13-episode season. So we have like extra of 60, 70 episodes filmed, but we didn't really have a place to publish. So it actually allow us to slowly start to publish them.

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

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [8]

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

Yes. So then in terms of what's driving the demand, it's the predictable subjects of yoga, meditation and mindfulness. Some of our more uniquely Gaia topics are starting to get some interest around what might be euphemistically called conspiracy theories, but people are starting to go look for information and finding Gaia. What's interesting is that our direct Gaia search terms is actually starting to be one of our highest-yielding sources of traffic right now. So that means enough people have become aware of Gaia that they're just going to search for Gaia directly and not coming to us through one of our topics, which is pretty telling for how much brand reach we're starting to be able to generate over this time.

In terms of the other partners driving exposure, some of our cable partners have talked to us about opening up, doing some free viewing windows while, particularly in the New York region, everyone was sheltering in place. And so we signed off on doing that. So we'll see what that does into the second half of the year. Effectively, we gave up some short-term member sign-up opportunity to just get a lot more awareness on those set-top box distribution channels. But as I said, we'll see what that does in the second half of the year.

Overall, I would say the trend that we saw in the second half of March were basically the add demand that -- for people we would be bidding against effectively evaporated. So we were able to get a lot of impressions for not a lot of money. I'd say that, that's coming back to some semblance of normal. It's definitely not where it was in early March, but it's getting back to some semblance of order. People have figured out how to spend their money effectively online. So we won't get the benefit on the media side, but our conversion rates are still growing both in terms of new initial signup, but then also in terms of the people that convert from trial to paid after their 7-day free trial. I think I got most of your questions. Did we miss anything?

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

Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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

No, no. That was great.

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

Operator [10]

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

Our next question comes from Eric Wold of B. Riley.

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

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [11]

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

A few questions as well. I know you made a decision to not increase the grandfather subscription prices on that roughly 100,000 subscribers at the lower price. Is there a timetable of when you think that may happen to push them higher?

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

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

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

We haven't set anything, but basically, what we did is we took our queue from what was going on in the world. And we said for these 95,000 people, it's not worth giving them price shock, especially after we saw the 20,000 that we lost from bumping the annual prices. So we'll just play it by ear, but you can assume it will be for at least the rest of this year.

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

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

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

Yes. I think the environment kind of changed with Disney coming with low price compared to Netflix. But we don't know how it lost. And when we go back, the -- our momentum is so positive right now that there's no really reason to do anything because it -- we more than make up the revenue from otherwise because things are going so well.

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

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [14]

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

And then obviously, you brought down your subscriber acquisition costs and talked about some of the things involved there, including the member referrals. How much has your average CPM seen that decline maybe since the start of the year? Are you -- how are you using that decline? Are you spending the same amount you otherwise would have spent, just getting the incremental impressions now for that same dollar amount? Or are you actually cutting back on what you spend with the lower pricing out there?

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

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

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

Well, so there's 2 parts to that question. What's the cost of the media, and that's driven by demand. And so again, in the second half of March, we saw that cost per thousand impressions or the CPM that you referred to go down pretty dramatically. If you notice, when you look at the P&L for the quarter, we actually spent right up to our threshold to stay EBITDA positive, and that included not spending any money in the last 7 days of March. So we actually hit our limit and stuck to our discipline. We probably could have spent more in Q1, but we didn't need to. And so now we're redeploying that in April. We're still marching under that plan of staying EBITDA positive through July but measuring how much we can spend against early quarter adds because they'll contribute to revenue and cash flow or the second 2 weeks in March. There was nominal contribution to revenue or member counts, but it was 100% impact to the P&L on the spend side of things.

So now we have an opportunity in early April to spend a little bit more aggressively while these CPMs are still low. And you can see, as of today, we're at 625-plus. So it's a better part of 20,000 net adds over less than a month, which is really good for us. And the quality of these members is maintaining, which has given us confidence that we can keep spending at these rates, and it's not going to be a flash in the pan.

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

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [16]

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

Okay. And then kind of going back to one of the questions on production. As you shy a lot -- you said in January and February and kind of work on that during kind of the shutdown, is there somewhat of a backlog of shows and stuff you want to be shooting right now, such that when you get the green lights reopened, you're going to get -- there'd be somewhat of a deferred content spending into maybe the latter part of this quarter or in the second half of the year versus what you would have spent already?

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

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [17]

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

No. I think what we had already planned on doing in Q2 of this year was really moderating production spend to make sure that we were where we needed to be from flipping over to that free cash flow perspective in July. So from an overall strategy perspective, we're actually right in line with what we expected to do. It just happened a little bit earlier in the year than what we expected. But I don't think that there's really going to be any meaningful impact to Q2 spend. And then summer is obviously usually a little bit lighter because a lot of our talent and the people that we want to have filming are out on their speaking circuit. And so now this year, that may not happen, which means we might actually be able to get more people on-site here filming in the summer where otherwise we wouldn't be able to get into their schedule. So it could be a net positive for the second half of the year, but there's not deferred spending. It was always intended to be measured against what revenue and cash flow from operations are so that we can get to free cash flow in July.

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

Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [18]

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

Great. And just final question for me, if I may. Just maybe kind of a high-level strategy question. Obviously, you talked about you spent in the quarter up to kind of the limits, you could say adjusted EBITDA positive in Q1, and kind of didn't spend anything in the final 7 days of the quarter. How should we think about the remaining quarters of this year and into next year? Is that kind of a strategy to kind of spend up to a certain level or maintain a certain minimal level of profitability? Or do you start getting that benefit flowing through and we start seeing EBITDA numbers really kind of move higher?

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

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [19]

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

Well, I'd say for the near term, until we get to where we're going in July, we're going to sticking very tightly to what we have outlined. And then once we get over into July, the question will be where is the best place to spend that incremental cash flow. Is it on content or is it on continued marketing? And I think that will be really time and place-dependent because it's unclear to how the U.S. and the world are going to shake this off even once people get the green light to start traveling again. So I think we'll have to wait and see how it goes through the summer. But usually, the summer would be a period of lower customer acquisition spending for us just because more people are outside and not looking to sign up for a service, which would give us an opportunity to spend some of that incremental money on content.

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

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [20]

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

Yes. So you kind of -- maybe your question was a little wider. So until we get free cash flow and earnings, we will stick in that positive EBITDA. When we get there, we still didn't make a decision how much we let it go for -- goes to the bottom line and how much we use spending more on something, kind of growth or content or something. But we, in content, in very good shape. So -- but I think when we kind of report the third quarter, that will be a good question to ask.

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

Operator [21]

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

(Operator Instructions) Our next question comes from Mark Argento of Lake Street Capital Markets.

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

Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [22]

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

Just a couple of quick ones. The tune you saw in the quarter from the pricing, any type of sub -- or was it more of a fitness yoga sub versus a truth seeker sub? Any color there that you can provide?

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

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [23]

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

Given when we added the majority of those subscribers, I would say that they were more skewed towards the fitness yoga side of things, not the core seeker audience. The bulk of that loss was from one cohort that was acquired back in the end of 2018 around our Black Friday promotions when we were still running those. So we expected there to be some loss from this group as we bumped their price up. So -- but it wasn't from our core-core group of people that are engaging in our original content very heavily.

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

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

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

Yes. There was -- yes, Paul. It was from -- more of it from the time they were -- we still doing some kind of deals which we don't do for like over a year, any. So it was more a final cleanup, and we expect that will be something regardless, but we threw all of that stuff right now.

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

Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [25]

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

Got it. And then in terms of the kind of acquisition channel going forward, I'm assuming Search, Facebook, YouTube, where are you seeing success more recently, especially with the uptake in 20,000 subs in 27 days?

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

Paul C. Tarell, Gaia, Inc. - CFO & Secretary [26]

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

Yes. I think it's actually across all those channels. We've figured out how -- now that we've consolidated our whole former marketing team into a sales team that's focused on driving revenue growth first, subscriber growth second and maintaining spend efficiency now that they're all together in 1 team. There's a lot of synergy that happens across all of those different channels. So something about one of our YouTube partner channels doing some promotion of Gaia allows my paid YouTube team to come in and do some retargeting and look-alike targeting against that audience. So it just means that the money that we are spending is done more effectively at a different part of the conversion funnel, but it's really -- everything is rising right now. And it's all a function of the 15 months that Jirka alluded to, where we've spent the time to get there. We've just gotten a tailwind behind us that's helping us with pretty decent momentum push that, again, based on the conversion rates and the annual plan selection tells me that these are quality members. There's just more of them than we're used to being able to add on a given spend level.

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

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [27]

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

And we also -- last 15 months, we have tremendous increase on quality of the product aside. And we also depublished pretty much as much as we published to kind of update the content and stuff. So there's other step that was done behind, it's not just the momentum was there right now. I think it's something -- will continue even if this lockdown stop. So -- but we talked about a few times on the calls, something what we call member-driven growth, and that's kind of what's driving a lot of it and will in the future.

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

Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [28]

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

It's helpful. One last one for me. Any change in terms of the mix from like CTV or connected TV, smart TV versus, say, mobile or tablet? Are you seeing a shift more to CTV given people stay in home? Any color there would be great.

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

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

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

Yes. It's interesting, actually, our -- or what we call our web app, so gaia.com has actually been a pretty significant increase in terms of the overall consumption, which is not 100% intuitive, but it seems like a lot of people are using their own computer devices to engage with content versus the TV that might be in the middle of everyone being on top of each other while the kids are trying to remote learn and the parents are trying to remote work. So I think that might be part of it. But generally, we're seeing an uptick in consumption across all devices.

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

Operator [30]

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

This concludes our question-and-answer session. I would now like to turn the conference call back over to Mr. Rysavy for closing remarks.

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

Jirka Rysavy, Gaia, Inc. - Founder, Chairman & CEO [31]

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

Well, thank you all, and thanks for joining. And we look forward to speak with you when we report our second quarter, and which is going to be in early August, all set. Thank you very much.

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

Operator [32]

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

Ladies and gentlemen, this concludes today's conference. You may disconnect your lines. Thank you for your participation.