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Edited Transcript of GAIA earnings conference call or presentation 1-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Gaia Inc Earnings Call

LOUISVILLE Jun 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Gaia Inc earnings conference call or presentation Monday, May 1, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jirka Rysavy

Gaia, Inc. - Chairman of the Board and CEO

* Paul C. Tarell

Gaia, Inc. - CFO and Secretary

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Conference Call Participants

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* Mark Nicholas Argento

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

* Zacary Sherman

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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's, Inc. financial results for the first quarter ended March 31, 2017. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell.

Following some prepared remarks, we will open the call for your questions. Before we get started, however, I would like to take a minute to read the safe harbor language. The following constitutes the safe harbor statement of the Private Securities Litigation Reform Act of 1995. Except for historic information, the matters discussed today are forward-looking statements and involve numerous assumptions as well as risks and uncertainties, including, but not limited to, general business conditions, integration of acquisitions, timely development of new business, impact of competition and other risks and uncertainties detailed from time-to-time in our filings with the Securities and Exchange Commission, including the company's 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. - Chairman of the Board and CEO [2]

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Thank you, Bethany, and good afternoon, everyone. Our first quarter results, including the subscriber count, ended again ahead of our expectation and guidance. Paid subscribers grew 58% to 247,300 from 157,000 at the end of the first quarter 2016. The growth rate increased sequentially again 6%, up from 52% end the fourth quarter and 46% during the third quarter. The revenue in the first quarter increased 51% to $5.8 million from $3.8 million in the same year -- same quarter a year ago.

Gross margin increased 440 basis points to 85.8%, from 81.4%. We have maintained our investment discipline and kept our loss, again, below plan even with the faster subscriber growth.

Our relaunch site increased page load speed and personalized experience for each subscriber as well as increased leverage of the search engine optimization, resulted in improvement in our conversion rate, which is driving some of our overperformance. Loss for the quarter was $6.2 million compared to $7.6 million in the year-ago quarter.

Now Paul Tarell will speak more for the first -- to first quarter results. Paul?

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

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Thanks, Jirka. Jumping right into our Q1 results. Streaming revenues in the first quarter increased 61% to $5.2 million compared to the year-ago quarter due to the 58% growth in paid subscribers Jirka mentioned. Gross profit in the first quarter increased 59% to $5 million compared to $3.1 million in the year-ago quarter. Gross margin increased 440 basis points to 85.8% from 81.4%. The increase in gross margin was primarily due to leverage gained on our streaming costs due to the higher volumes and our investment in owned and produced content.

Total operating expenses in the first quarter increased to $11.8 million, which were slightly better than our expectations and are comparable to $7.2 million in the year-ago quarter. The increase was due to the planned increase in selling and operating expenses associated with the announced acceleration of subscriber growth throughout 2017.

I'd like to remind our listeners that we elect to expense subscriber acquisition costs in the period incurred, and despite the significant lifetime value, do not record any value of our subscribers on the balance sheet.

Net loss in the first quarter was $6.2 million or $0.41 per share compared to a loss of $7.6 million or $0.31 per share in the year-ago quarter. Our net loss for the first quarter of 2016 included approximately $3.5 million losses related to the operations of the disposed Gaiam brand business segment. The per share amounts reflect the repurchase of approximately 40% of our outstanding shares in July of 2016.

During the quarter, we paid approximately $2 million of accrued payables remaining from the sale of the Gaiam consumer product business. And on March 31, we had $45.4 million in cash, no debt and unencumbered ownership of our 12-acre, 150,000-square-foot campus.

With that, I would now like to turn the call back over to Jirka, after which, we will open the call up for questions. Jirka?

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Jirka Rysavy, Gaia, Inc. - Chairman of the Board and CEO [4]

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During the quarter, we have expanded our subscriber reach to several new territories bringing our current count to 150-plus countries. We also grew our current U.S. library to approximately 7,900 titles. About 80% of all the views on Gaia were again generated by the content produced or owned by us.

At the end of the quarter, we also launched Gaia on all Comcast Xfinity platforms. As announced, we expect our subscriber growth rate to keep accelerating. After higher-than-expected jumps, we expect subscriber growth keep increasing to about 62% in the second quarter. The second quarter for us, same as, for example, Netflix, is the slowest seasonal quarter. The growth rate of 62% would bring the paying subscriber count at the end of the second quarter to about 275,000, up from 169,500 at the end of the second quarter 2016.

In May of last year based on the market value of our share float, Gaia was added to Russell 2000 and 3000 indexes. After that, in July of last year, we repurchased about 52% of our float in a stock buyback. Our share's price increased since then, [about] 40%. So we expect that our current market cap will not be enough to maintain our inclusion in the Russell indexes for the coming year. And that during the rebalancing occurring these months and some of which you can start experience last few days, about 20% of our float which is currently held by index funds will be available for sale.

We intend for subscriber growth rate to keep accelerating by about 4% to 6% per quarter to end up this 80% for 2017. The subscriber count during the first quarter grew sequentially 45,000 to 247,000 from 202,000 at the beginning of the quarter, which is already well above the 80% annualized growth rate target.

As the 58% subscriber growth rate in the quarter exceeded, again, our target and guidance and our cost of acquiring these customers continues to track at or below our plan, we believe that the result -- these results supports our subscriber growth expectation for remainder of the year.

And with that, I'd like to open it for the questions. Operator, Bethany?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Mark Argento of Lake Street Capital Markets.

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

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Just wanted to maybe drill down a little bit. Looks like you're doing a decent job on the acquisitions side beating our number in terms of total sub adds in the quarter. You talked a little bit about the channels in which you're acquiring the subscribers and then some of the -- I know you don't break out specific subscriber acquisition costs, but maybe you can just talk about general trends and where they are. Obviously, looks like you've been able to acquire them fairly cost effectively.

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Jirka Rysavy, Gaia, Inc. - Chairman of the Board and CEO [3]

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So we, right now, really focusing on our kind of what do we call seekers for kind of this time of the year. However, in January, which was part of the first Q was, primarily, Yoga because it's kind of new me. So it's for this quarter was about mixed. Those are pretty much -- we don't really go after transformation almost at all since the channel’s relatively new, and we still don't have enough data. So pretty much that was kind of mixed in the first quarter.

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

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Yes. And then in terms of the CPA trends, as you know, we don't disclose those for competitive purposes. But they've been continuing to trend in line with the numbers that we're targeting, and actually part of the overperformance in adds is because -- and the underspend is because we're able to get them less than we're budgeting. We're just continuing to tweak and refine our growth audiences as we go out and expand, and we're just not hitting an upper threshold of growth as we thought we might, which is good for us for the rest of the year.

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Jirka Rysavy, Gaia, Inc. - Chairman of the Board and CEO [5]

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It was actually interesting that since this was probably, obviously, our fastest grow in the quarter as we keep accelerating so far, the numbers as we getting in March to [CPA] actually get quite below what we expected to pay, which we were really pleased to see, which kind of supports the idea of the big size of the market. So it was pretty important to us, and we were happy about it.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets and Senior Research Analyst [6]

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So the combination, I would assume, of page search and Facebook and any mix change is there or has it been fairly consistent?

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

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I would say it's been fairly consistent overall what we're doing now, that was -- since we've been accelerating, and we have several months. We're just continuing to tweak and refine the mix of what we're doing and how we're doing it. So I'd tell you it's same overall channels and mix. It's just much better insight into the customers that stick around versus just the customers that are easy to get but maybe don't retain.

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Jirka Rysavy, Gaia, Inc. - Chairman of the Board and CEO [8]

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Also, as I mentioned, when we relaunched the site end of the last year, the conversion rate with personalized offering all these other features kind of helping us to overachieve than what we thought will be our target.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Head of Capital Markets and Senior Research Analyst [9]

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Got it. All right. And then in terms of the content costs, obviously, you guys are going to be spending a little more. Any thoughts around kind of where you see content costs shaking out for the year?

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Jirka Rysavy, Gaia, Inc. - Chairman of the Board and CEO [10]

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Well, we kind of -- it's kind of changing pretty much by the quarter as number of subscribers changing. But the numbers of the cost of the -- per hour production, it's probably came from 4,000, 5,000, 2 years ago to probably right now it's running between 8,000 and 10,000, which is still kind of quite less than 10 million of Netflix. But we're going to be pretty discipline on that stuff. The license content is probably -- it's quite cheaper than produced content.

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Operator [11]

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(Operator Instructions) And we will take our next question from Zacary Sherman of Foxhill Capital.

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Zacary Sherman, [12]

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I think in the previous quarters, you did break out what your subscriber acquisition costs were. I may have missed it, if you said it previously, or could you do that for this quarter?

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

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Yes. So, Zack, this is Paul. It's a required annual disclosure under GAAP, which is why we've done it in Q4. It's not something that we plan on providing quarterly updates on. But for this quarter, I will give you the breakout here just because you've asked. So it's about $6.3 million in terms of the spend for Q1 in customer acquisition.

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Zacary Sherman, [14]

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Great. That's very helpful.

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

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And just a little bit of context there. Some of that spend was related to what we were doing with the Gaia on Xfinity platform launch. So it may not all be directly correlated to the direct business.

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Operator [16]

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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. - Chairman of the Board and CEO [17]

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Thank you, and thanks, everyone, for joining. And we look forward to speak with you when we report our second quarter, which will be in early August. Thank you very much.

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Operator [18]

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