Q3 2023 Gaia Inc Earnings Call
Participants
Jirka Rysavy; Founder, Chairman and CEO; Gaia, Inc.
James Colquhoun; COO and Director; Gaia, Inc.
Ned Preston; CFO; Gaia, Inc.
Mark Nicholas Argento; Analyst; Lake Street Capital Markets, LLC
Thierry Joseph Wuilloud; MD; Water Tower Research LLC
Presentation
Operator
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia, Inc.'s financial results for the third quarter ended September 30, 2023. Joining us today are Gaia's CEO, Jirka Rysavy; COO, James Colquhoun; and CFO, Ned Preston. Following some prepared remarks, we will open the call for your questions.
Before we get started, however, I would like to take a minute to read the Safe Harbor language. The following constitutes the Safe Harbor statement under 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, our ability to attract new members and retain existing members.
Our ability to compete effectively, including for customer engagement with different modes of entertainment, maintenance and expansion of device platforms for streaming. Fluctuation in customer usage of our service, fluctuations in quarterly operating results, service disruptions, production risks, general economic conditions, future losses, loss of key personnel, price changes, brand reputation, acquisitions, new initiatives we undertake, security and information systems, legal liability for website content, failure of third parties to provide adequate service, future internet related taxes.
Our founder's control of us, litigation, consumer trends, the effect of government regulation and programs, the impact of public health threats, including the coronavirus, COVID-19 pandemic and our response to it and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, including our reports on Form 10K and Form 10Q.
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 CEO, Jirka Rysavy. Please go ahead, sir.
Jirka Rysavy
Thank you, and good afternoon, everyone. Well, I'm glad again, we can continue reporting positive results. Revenue for third quarter increased to $20.2 million sequentially, up from $19.8 million and from last year of $19.9 million.
During the quarter, our member growth doubled sequentially to over 16,000 ending with 790,500 members, which is above 776,000 we reported last year. So we more than recovered to [2022] losses, which were caused by the industry-wide post-COVID subscriber contraction.
Virtually all the growth in this quarter is coming from our direct members. Our ARPU continuing to grow steady as and we did over the last five years and shall be further supplemented by our recent launch of Gaia marketplace. We have rolled our marketplace in September to less than 5% our members and generated over 100,000 sales in first 20 days. We had a [virtual] any marketing cost.
And annualized gross profit per employee improved again during the third quarter to our new all-time high of over 650,000, reflecting our increased efficiencies. Our loss improved to 600,000 or $0.03 per share, down from $2.4 million or $0.11 per share, and EBITDA increased to $3.9 million from [$1.8] million during last -- quarter last year.
We continue to generate positive free cash flow with the cash on September 30, growing to $11.2 million from $10.9 million at the end of the last quarter. Now James will cover the marketplace and some other new marketing initiative, and then Ned will speak more about financial results. James.
James Colquhoun
Thank you, Jirka . So we rolled out a beta version of marketplace in September, initially targeting less than 5% of our members and the results have been truly exciting. Within the first 20 days, we were able to generate over $100,000 in sales. And all of this was achieved with zero paid marketing costs. This achievement is testament to the strong connection we have with our members and the appeal of the marketplace's offerings. It also demonstrates the significant potential for growth that lies ahead of us as we expand our offering into 2024.
The launch of Gaia marketplace is a significant step forward for us. It's not just the new feature represents strategic expansion of our platform, and it allows us to diversify our offerings and support the conscious lifecycle of our members in a more meaningful way, whilst also improving our proof, which is a key metric for us to focus on as we move forward.
Marketplace will include a carefully curated selection of experiences, retreats courses and products that resonate with our audience, which will be offered to members at a discount to the market to help us create a thriving ecosystem that benefits both our members and Gaia. A key passion and focus for me is improving our marketing efficiency. And I believe there to be a lot of untapped opportunities for us, especially with our direct-to-consumer marketing campaigns and digital events. Marketplace will play a critical role in this as it will contribute to free cash flow, which we will use to accelerate our growth initiatives as we focus on scaling to 900,000 subscribers as quickly as possible whilst maintaining positive cash flow. Now Ned will talk more on our financial results.
Ned Preston
Great. Thank you, James. Revenues for the third quarter were $20.2 million, a sequential increase for the third consecutive quarter, continuing the return to growth in our member base during the first three quarters of 2023.
Compared to the year ago quarter, revenues grew by 2% as the Company recovered from the post-COVID subscriber contraction experienced industry-wide during 2022. In the quarter, we continue to invest in and release new content, particularly to support our language expansion efforts.
As a result of these strategic growth investments, gross margins were 85.2% during the third quarter of 2023, and we expect them to remain at this level for the near term as we expand our language offerings and tactically support the growth of the business.
Total member acquisition costs during the quarter were $8.4 million or 41% of revenues aligned to our second quarter costs. In the third quarter, we experienced growth in our direct member base, which is continuation from the first and second quarters.
Selling and operating expenses, excluding marketing and member acquisitions, costs in the third quarter were $7.9 million or 39% of revenues, which was a $0.7 million or 8% improvement from the prior year period. This decreases due to cost reductions completed earlier in the year and employee retention tax credits filed during the quarter.
Corporate and G&A expenses in the third quarter were $1.4 million, down 29% from the prior year period due to the cost improvements in the first half and the aforementioned payroll tax credit.
During the third quarter of 2023, we recorded a loss of $0.6 million or negative $0.03 per share compared to a loss of $2.4 million in the year ago period. The improvement was primarily driven by expense reductions and increase in revenues between periods.
EBITDA was $3.9 million or 19% of revenues in the quarter and we generated free cash. Our deferred revenues for the third quarter were $15.3 million, an increase of $0.8 million from the year ago period.
We expect to continue to benefit from the inherent negative working capital cycle in our business model as we continue to grow our member base and revenues. In addition, we expect to be in a position to continue generating cash flows from operations in excess of the cash flows, we reinvest back into our content library and product enhancements going forward.
Due to our in-house production capabilities and absence of contractual commitments tied to our content production, we have significant discretion in the amount and timing of our investments. This flexibility allows us to adjust our investment levels as needed to withstand a downturn in the macroeconomic environment if necessary.
Through the Company's focus on accelerating growth and a return to positive operating margins, we have made tremendous progress over the past few quarters on numerous key areas of improvement for the business. With continued disciplined execution and the launch of the Gaia marketplace, we are well positioned to continue growing revenues and to remain cash flow positive going forward.
With that, I will hand it back to you, Jirka, for some closing remarks.
Jirka Rysavy
Yeah, we expect our member growth to further increase in 2024 with continuing growth of ARPU. For 2024, we are targeting about 15% growth in revenues. It's about 10% growth in our members with a strong growth of ARPU which should be helped by our planned price increase, for the new members into second part of next year.
We also expect to continue to increase our gross profit per employee benchmark. And I personally believe that Gaia is in the best place since we started our streaming business. Our goal is now simple to grow fast to 900,000 members while continuing to generate a positive free cash flow.
I encourage you to visit ir.gaia.com and download the investor presentation to see our pro forma, how come we can look at 900,000 members of annual average. That means 900,000 in the middle of the year. We would update this probably within an hour.
Over the next few months, I also plan to promote subject to our Board approval, our CEO and CMO, James here to CEO position. And I know James for seven years. We merged SVOD business, FMTV into Gaia in 2019. And FMTV had the same mission as Gaia and grew to over 600,000 subscribers without any outside funding solely dependent on James's marketing skills.
James would continue to report to me in my role as Executive Chairman. I would focus on creation of Gaia community, which we talked before, and that's the main part being part of our mission statement and should be the final differentiation from all our other video streaming businesses. I hope to launch Gaia community after we reach our 900,000 annual member average milestone.
So this concludes our remarks. So I would like to open to questions. Operator?
Question and Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)
One moment, please while we poll for questions.
Mark Argento, Lake Street Advisors.
Mark Nicholas Argento
Hey, good afternoon, guys. Just a quick question. Looks like your actual sub adds were a lot stronger than what we had been modelling. Could you just touch on kind of the environment out there from subscriber acquisition perspective, the cost to acquire a sub and what channels you're seeing that success?
Jirka Rysavy
Well, it�s the environment -- I think it's been obviously better than it was last two years quite a bit. It's not fundamentally different than second quarter. I think the doubling our grosses pure internal I think James helped a lot. We didn't have really CMO. So he's kind of functioning much more than a CMO and COO right now.
And the cost of acquisition, it's kind of the similar as the second quarter. May be a little cheaper on domestically and we saw little bumps in places like Latin America and the churn kind of bump a little bit because of all the internal, mostly internal things which create cards and stuff, but pretty much for 90% of our business was more positive. And I expect, as I said, that the member additions to increase again next year from where we are right now, we still have definitely some room, and I think there will be -- the main part of this James you want to --
James Colquhoun
Sure, Mark, I would also add that we're focusing a lot -- my focus is especially with the growth and marketing team is on conversion rate optimization. So card conversion, guest and member conversion first, 30 days, 60 days, 90 days. This is a really key focus of ours now.
So with the improvements in efficiency that we're seeing in CPA costs, which have come down marginally throughout the year, especially if we compare to the start of the year until till now, there is improvements in CPA costs, whether that's because of the macro environment less and less competition or otherwise, but it's still coming down for us.
And we're also working on our side, improving that with a conversion rate optimization. So I really seek to see more improvement in that in 2024. And marketing efficiency is a very core focus of mine for the '24 year as well.
Mark Nicholas Argento
It's helpful, thank you for that. And just, pivoting to -- I think you said you're going to take pricing in Q2 of next year. What do you think, you know, in terms of the pricing, how big of an impact could that have in terms of the ARPU, from the latter part of that year?
Jirka Rysavy
Well, we're not going to do to Q2, it's going to be probably middle of Q3 somewhere closer to September. Rethinking about $2.40 for the new members. And we probably will focus on monthlies to move more people to annual.
So we probably won't raise annual. Annual takes right now about 25%. And but that's kind of the strategy. Not also we kind of hope that will help lower their attention because people cannot come and leave and come on a same price. But -- and also, that's one of kind of when I kind of said, we'll grow revenue, 15 members stand is because we expect that increase price for your members will probably take a hidden conversion. So we wouldn't grow revenue as fast. I mean, the members as fast as revenue or. So, but our goal is obviously the revenues into growing the revenues.
James Colquhoun
I think second to what you were saying, we would be grand-fathering or a grand-mothering either all how we say it, our existing members. So there is a retention play there in that we can promise our existing members that will stay on their existing monthly price point. And then by not touching our annual price point, it will create a bigger price difference between the monthly and annual membership, which we hope to skew more conversions upfront or ongoing up to annual because we see the churn rates on customer cohorts that stay longer than one year in particular, longer than two and three years, much more beneficial for us as a brand. So we want to skew to commit more membership term as much as possible.
Ned Preston
And Mark, this is Ned. I think the last part of your question was around the ARPU. And so of course, all of this, along with some of the other offerings that James will be spearheading around our other offers plus the marketplace. The combination of all of that plus the increase we do anticipate would take our ARPUs up, obviously, which we can outline in future meetings with you. But I think that was the last part of your question.
Mark Nicholas Argento
Yes, Ned, that's super helpful. And then in terms of the marketplace business, obviously pretty good uptake with no marketing dollars behind it. Make you more encouraged in terms of the opportunity and does that change your timing or aggressiveness at all? in your guys' perspective?
Ned Preston
From our side, we plan to be as aggressive as possible on executing our marketplace. The main focus for us internally at the minute is curating and building out our SKU offering around the three core verticals of retreats or experiences, 10 courses, then physical product. And once we have more of that in place, we'll continue to roll out wider to our membership base.
And as we get testing data of what offers performed best. That will inform our marketing, and we'll continue to keep expanding that. And Jirka, has a strong background in e-commerce and retail product with the previous version of Gaiam and can see a huge potential for this given the community that we have at the moment.
Jirka Rysavy
And we want to be really selective in the products because we kind of -- it's basically mostly only target to our members. So which what I would say 90% of revenue will be from our existing members. It's you can buy it if you're not a member obviously, but we won't promote it outside at least not for now.
And members also get a 10% discount. So if you come and you know, by $7,000 trip, it's better to become a member, and get a 10% discount. So it's kind of around that. But we kind of we're going to -- I'm going to look at it, it�s kind of beginning of the Gaia community. So we want to attract people, especially like our kind of items right now what we really push through launch was we have two seasons of show what's our most TV show called Ancient Civilizations, which we really talk about, period regular time.
And so we basically launched at the tour as a producer in Egypt, and sold really quick, on pretty high prices, those prices typically a $10,000 per trip. So, you know, it's very lucrative business overall. And but we want to be very selective. So we don't disappoint our customers with the offering.
Ned Preston
And I think one final thought there, Mark, from an investment community perspective, to summarize the marketplace offering it's like a conscious version of Costco in that at a discount membership model. But also there's in a way a QVC component because we have content that speaks to the offerings as well. So I'd say that's a quick way to summarize the focus.
Jirka Rysavy
And also if you model it the way how we can look at it and these trips. So we take 30%, we provide 10% discount. So effectively only to 20% is the revenue and the operating income, the rest we treat as outside vendors. So it's going to be relatively high margin.
Mark Nicholas Argento
Great, very helpful. Good luck for you guys. Thanks.
Jirka Rysavy
Thank you.
Ned Preston
Thank you.
Operator
(Operator Instructions) Thierry Wuilloud, Water Tower Research.
Thierry Joseph Wuilloud
Yes, thank you. Good afternoon, and James congratulation on the new position. James, can you explain a little bit about revenue and for the marketplace? And I was going to ask you, but I think I kind of got it. So that the $100,000 of revenue that you say, that's your share of commission on the gross sale number Gaia marketplace -- is it how that works?
Jirka Rysavy
No, it's the original one what we both basically one to was the sale was 100,000 from then we would report revenue about 20.
Thierry Joseph Wuilloud
Okay, I got it. Okay, great. I was -- you haven't talked about third party channels in Hawaii. Can you give us a bit of color there? -- Are you putting some emphasis on a specific one or what's your thought around that? Obviously, the direct member acquisition seems to be doing really well, but any color on third party channels?
James Colquhoun
Thierry, hi. Thank you for your congratulations, pending Board approval, of course. I will speak to third party that reports directly to me. It has been a flatter compared to our direct membership growth. However, I'm seeking to be more aggressive in our expansion with third party keeping it in alignment with our current balance of direct to third party revenue contribution, making sure that it doesn't get too high, that we plan to be growing third party in particular by rolling out new territories in 2024.
In particular with our largest third-party distributor, which is our partner, which is Amazon Prime. So we have a Prime video channel within the Amazon infrastructure, and we are in the process of renewing our agreement with them to expand the term for a longer period of time.
I just met with one of the eminent Amazon executives over the weekend to confirm this and we have already plans for Q2/Q3 -- sorry, Q2, correct for Australia and New Zealand. And I'll be meeting with the Australia New Zealand rep as well. So this is very much in my court and I'm seeking to expand our international expansion with third party.
Jirka Rysavy
Yeah, with Amazon, we actually triggered initiation, a renegotiation because our price increases, we plan to do. So, you have to kind of give them notice and signing new agreements with the higher price. So there was cost -- this negotiation was actually initiated by us. And also when you asked the question about a 100,000 sale. So it was the first, 20 days, we get 100,000. The tour is actually sold. So it creates about 100,000 in revenues from the first trip from the single tour, but it took like a month and half to sell it.
Thierry Joseph Wuilloud
Okay, great. We've talked about ARPU, and we've also talked in previous conversation about the focus on international growth. Is there big difference in ARPU from your international members versus to U.S. members?
Jirka Rysavy
No, there's no, -- I mean, short of some Latin America, which we scaling actually down, which we kind of play with lower prices, but didn't really work for us. So it's basically the prices we would charge pretty much in year over similar as we would charge here. So dark we're seeing pretty much for right now.
Ned Preston
And Thierry, I would add, there are there are three drivers for increase in ARPU next year. One Jirka already mentioned, which is about the planned price increase from Circum middle of the year. In addition to that, what we've spoken about is marketplace with the revenue attribution. And then third would be an increased focus on our premium Gaia events plus tier at 299 a year. That's also something that I have my sights set on for expanding in 2024. So each of those three levers will be improving our throughput throughout the next year.
Jirka Rysavy
Yeah, the increased ARPU, it was always as a part of our mission. And now we actually want to accelerate that because now we kind of get to the place where we can generate positive cash flow, continuously. So the ARPU become much bigger full focus right now. So the revenue will be definitely our focus more than the numbers of members. So going forward, it's going to be our focus. That's why the ARPU and how this initiative like increasing the price Gaia Sphere -- sorry, Gaia Sphere -- premium pricing is sevens plus or the marketplace. So they all effectively when we say that we going to grow members 10% of revenue, 15%, you'll see that we are increasing the ARPU dramatically and we will do want to keep doing it.
Thierry Joseph Wuilloud
Great. Maybe a last question. In your Jirka, you mentioned that you will be focused on Gaia community. Can you tell me what does it mean is it is it focused on the marketplace? Is it focused on live events? Or what did you mean when you said you'll focus on Gaia community?
Jirka Rysavy
If you go to the bottom of our gaia.com, you'll see the what the mission is. So that's pretty much the community what I'm talking about. We kind of look at launching it -- we already built something about a year ago. But that time we decided to where it was designed. The communities right now too much split between that by the different events in the world. So it's not a time to launch it. So we have structured a little bit.
So it's basically -- we have now, two-thirds of our people are with us more than a year and one-third over three years, and that's increasing, that the three-year number, obviously, increasing every month as a percentage. And so we know a lot of people watching what are they interested, in one of the things what you hear is they would like to find people like them watching Gaia in their community. So yes, it's going to be focused, we going to use all our venues, what you mentioned as a part of that.
Thierry Joseph Wuilloud
Okay. That sounds very interesting. Great. That's it from me (multiple speakers) --
Jirka Rysavy
I think that will be defined out for differentiation for us. If you're looking at other [slots] that become in three years we have something what nobody else in this, world has of growing and it's a niche business and we want to keep it that way, and that's community will be based on that.
Ned Preston
And Thierry, if I had to say one part of that that you're alluding to amongst many things would be some form of a decentralized town hall in a way where members can get together and forms and like you mentioned, organized Watch Parties and meetups.
Thierry Joseph Wuilloud
That sounds very interesting. Great, thank you, guys.
Ned Preston
Thank you.
Operator
We have reached the end of our question-and-answer session. I would now like to turn the call back over you, Mr. Rysavy for closing comments.
Jirka Rysavy
Well, thank you, everyone, for joining, and we look forward to speaking with you when we report fourth-quarter results in March. Thank you very much.
Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
