Gaia Inc (GAIA) 2018 Q1 法說會逐字稿

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, 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 now like to turn the call over to Gaia's CEO, Jirka Rysavy. Please go ahead.

Thank you, and good afternoon, everyone. Our first quarter results ended again ahead of our expectation. Paying subscribers grew [70%] to 421,000 from 247,000 a year ago, and 364,000 90 days ago. This is ahead of the pace needed for reaching our target of 1 million subscriber at the end of the next year.

Streaming revenue compared to the same quarter of last year increased 75%, and total revenue 66%. Gross margin grew 100 basis points to 86.8%, and we expect to maintain this level for the rest of this year. We have again maintained our investment discipline. We were able to meaningfully decrease our dollar spending per customer acquisition to mid-80s from mid-90s a year ago.

Being ahead of the pace for our 2019 target, we now plan to focus on bringing more of higher lifetime value member rather than keeping decreasing our cost per acquisition. As of March 31, we have $50 million in cash, $27 million headquarter campus and no debt.

And Paul will now speak more about the quarter.

Thanks, Jirka. Streaming revenues in the first quarter increased 75% to $9.1 million(sic) [$9.6 million] compared to the year ago quarter due to continued strong subscriber growth.

Gross profit in the first quarter increased 66% (sic) [68%] to $8.3 million compared to $5 million in the year ago quarter. Gross margin increased 100 basis points to 86.8% from 85.8%. The increase in gross margin has continued to be driven by increased revenues and lower per subscriber costs to deliver our service, including 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 first quarter were $16.2 million compared to $11.8 million in the year ago quarter. Most of the increase was driven by increased spending on customer acquisition costs to support our accelerated growth rates. It's worth highlighting that our customer acquisition costs as a percentage of streaming revenues declined to 109% in the first quarter of 2018 from 121% in the year ago quarter, despite the increase in volume of subscribers added. This is due primarily to continued efficiencies in our marketing efforts, which as Jirka mentioned, resulted in reducing our average per subscriber acquisition costs to the mid-80s in the first quarter of '18 from the mid-90s in the year ago quarter. It's important to reiterate that we include all marketing expenses in these numbers, including the cost of translating our existing library and launching our foreign language offerings in the first quarter of 2018.

The first quarter is typically our strongest quarter for adding subscribers to our Yoga channel, which is the channel we spend the least per subscriber to acquire, but also have the lowest lifetime value of our channels. As Jirka mentioned, with our focus on growing to 1 million numbers by the end of 2019, we will be emphasizing our customer acquisition efforts on our highest-value subscriber segments for the rest of the year. We will be targeting investing 95% to 105% of streaming revenues each quarter in the subscriber acquisition efforts for the rest of the year, while maintaining our discipline of not spending more than 50% of lifetime value per subscriber. This represents a modest decline from the rate of investment in the first quarter as noted earlier.

With the success of the past 7 quarters executing on our plan, we have given ourselves the ability to really focus on these higher-value segments, which are more challenging to find, but have

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And this is the operator, we are experiencing just a brief interruption in today's conference. Please remain on the line, while we establish the speaker's line. Thank you for your patience. And please, continue.

Sorry, about that. So I'm going to go backwards a little bit to make sure that everyone got the point here. So total operating expenses in the first quarter were $16.2 million compared to $11.8 million in the year ago quarter. Most of the increase was driven by increased spending on customer acquisition costs to support our accelerated growth rates. It is worth highlighting that our customer acquisition costs as a percentage of streaming revenues declined to 109% in the first quarter of 2018 from 121% in the year ago quarter, despite the increase in volume of subscribers added. This is due primarily to continued efficiencies in our marketing efforts, which as Jirka mentioned, resulted in reducing our average per subscriber acquisition costs to the mid-80s in the first quarter of 2018 from the mid-90s in the year ago quarter.

It's important to reiterate that we include all marketing expenses in these numbers, including the cost of translating our existing library and launching our foreign language offerings in the first quarter of 2018. The first quarter is typically our strongest quarter for adding subscribers to our Yoga channel, which is the channel we spend the least per subscriber to acquire, but also have the lowest lifetime value of our channels.

As Jirka mentioned, with our focus on growing to 1 million members by the end of 2019, we will be emphasizing our customer acquisition efforts on our highest-value subscriber segments for the rest of the year. We will be targeting investing 95% to 105% of streaming revenues each quarter into subscriber acquisition efforts for the remainder of the year, while maintaining our discipline of not spending more than 50% of lifetime value per subscriber. This represents a modest decline from the rate of investment in the first quarter as noted earlier.

With the success of the past 7 quarters executing on our plan, we have given ourselves the ability to really focus on these higher-value segments, which are more challenging to find, but have much higher retention. With a lifetime value of roughly double Yoga subscribers, the long-term impact of this focus will result in a much higher return on our investment in customer acquisition efforts.

The overall net loss in the first quarter was $6 million or $0.39 per share compared to a net loss of $6.2 million or $0.41 per share in the year ago quarter. As of March 31, we had $50.7 million in cash compared to $32.8 million at the end of 2017. On March 26, 2018, we closed an oversubscribed public offering of our Class A common stock, issuing approximately 2.7 million shares, which included the full overallotment. We received net proceeds of approximately $37 million. This offering brought our outstanding share count to 17.88 million shares.

I'd like to point out that the majority of our Board of Directors and executive management team participated in the offering. The offering will now allow us to retain ownership of our corporate campus, which is becoming a strategic part of our future community initiatives. During the quarter, we also paid down our $12.5 million line of credit that was outstanding at December 31, and now carry 0 debt.

With that, I'd like to open up the call for questions and turn it back over to the operator.

(Operator Instructions) Our first question today will come from Mark Argento with Lake Street Capital Markets.

Just a couple of quick questions. First off, can you talk about to get to that million sub mark by 2019, what your plans are in terms of additional channels above and beyond what you have currently? And then also wanted to get a better feel for how you see kind of end of year 2018 sub-number, if you're comfortable talking about that.

So the next channels, we don't really need any new channels to hit our million subs at all. However, we're probably going to bring either conscious like -- I mean, Expanded Consciousness or Alternative Healing. But we clearly don't need that for the numbers, and I don't expect they will be a dramatic portion of that million. As far as the -- where we plan to be end of the year, we kind of plan to be pretty consistent on the pace as much as we can. We'll see how it is through the summer. We don't want to put specific guidance for end of the year, because I don't think it's that important, at least for us. But it's not going to probably vary much from the average growth rate. We're a little ahead of the grow, as you noticed, what we need to get there for the million kind of the next year and that's why we want to kind of bring really up our ante, so it's how much we spend per -- which kind of customer we have. We want to go more for the higher life -- like the world-class customers. And we kind of started to see that our lifetime value, what we call mature customers, increasing but averages because we take it -- basically, we have so many new customers with this high growth, kind of tick up only slightly, but (inaudible) customer is different. So I think we still kind of look at this optimal growth rate by the quarters, because first and fourth quarters are easy to get customers, same for us or Netflix. And so we'll see how it goes through summer, but I would say kind of you can expect pretty even pace between now and then as an average and then some quarters will vary and there will be a recollection of what's happening in the quarter, unlike acquiring media, especially like YouTube, Facebook a little of those kind of media.

So just back to the envelope math, it looks like with this recent capital raise and some -- hopefully at some point in time you start to get some additional cash or I guess you do have cash flow now, but additional cash flow building which you can reinvest back in the customer acquisition. But this capital should get you pretty closer, if not all the way to that million sub mark in '19. Is that an accurate statement?

Oh, for sure. We should...

It's more than accurate.

We would have a spare capital right now, because the offering was 6x oversubscribed, so we tried to -- we get -- took a little more money than we actually planned to -- needed it or planned to take, so we have some spare as well. But yes, so don't expect any more. We don't really plan to do anything on that side. Also, as we kind of get more to breakeven point, that negative working capital will show up.

Yes, just one other in terms of capital. Yes, one other thing, Mark. We did pay off the line, but it's still available to us if we need it through the end of 2020. So that was part of the reason why that's structured as a line of credit.

Mark, just for you to know my feedback here, so we kind of -- you know we did said the call was dropped. It was in somewhere in operator side, but we don't know what happened. Did you hear everything what we said from prepared remarks?

Yes. We heard most everything and then it came back. So yes, I think everybody should be up to speed.

Okay, thank you.

Thanks.

And next will be Eric Wold with B. Riley.

A couple of questions as well. I guess, one, just a follow-on to Mark's question on kind of the new content. And I know Jirka you mentioned, you don't really need to launch any new channels to reach that million sub target by the end of next year. What would be the process of launching a new channel pulling out either Expanded Consciousness or Alternative Healing, which are in health out of the content that you currently have? I'm assuming the incremental expense to be relatively minimal, but should allow you to potentially target a new group of subscribers that may not be kind of being hit right now. Is that correct?

Yes, you're correct. The content spend will be consistent regardless if you're launching or not, because we don't really fund per channel. We kind of do per title. So it's the question what the title will be. So I don't think we fundamentally change the number of titles, we would just shift them to new channels. So I don't think the content spend will not be affected if we launch it or not. We grow the content spend may be half pace what we grow the subscriber pace, money cost per hour. So -- and it's regardless which new channel we launch.

Okay. And then, Paul, on the comments that you expect the ratio of subscriber acquisition cost spend to revenues to kind of be in that 95% to 105% pace through the remainder of this year as you focus on the higher profile subscribers. Can you give us the comparable levels for last year?

Sure. So if you just ran through the -- as a percent of streaming costs and this is just -- we've talked about it previously, but I'll just give it to you. So as I mentioned in my prepared remarks, it was 121% in Q1 '17, and then it was 99% in Q2 '17. Dropped down to 86% in Q3 '17, and then as we said on our last call, it was 93% in Q4 '17.

And 109% in the first quarter.

And 109% to just reiterate for this Q1.

Okay. So possibly a little higher spend this year to kind of ramp up the subscriber add, before we started seeing possibly more efficiency in the next year?

Yes. And if you -yes, I kind of alluded to it in my prepared remarks. But if you think about a Yoga subscriber with about half the lifetime of a Seeking Truth subscriber, we'd effectively have to acquire close to double the number of Yoga subscribers, if that's what we focused on. So it's really about the point. And as you Jirka mentioned, the 2-plus year mature members has been increasing in value and that's been most predominant in that channel, so we're really trying to optimize for the beyond 2019 value of the subscriber base.

If you take the dollar spend, because most of that we spend in the first quarter, so you -- that guidance what he gave you, like 95% to 105%, it's actually a slight decrease from overall spend. So it's not actually going up, it's going down, but it's not going to grow as dramatically as we did before. Same as I mentioned per customer, it will -- it came down pretty dramatically the acquisition cost from the 90s to mid-80s, but we kind of don't want to really keep dropping it. We'd rather increase the value of the customer, our lifetime value per customers than keep driving the cost down in absolute dollar. So it's still slight decrease, but it's not really dramatic decrease.

Okay, that makes sense. And then just final question, any initial read or kind of results you can give us on what you've seen from the international, the new language launches over the past couple of quarters in terms of subscriber growth or kind of where the -- your subscribers are coming from?

Yes, I mean, we have -- we didn't really -- we don't need anything again from million. So it's like opportunistic. We start to look at marketing a little bit more in places like Australia, which is still like more English language and Canada, which we didn't. Australia have very good results, so the conversion there is higher than the United States. The -- through international, like different languages, we don't really push there. In Spanish, which is now like we have few -- a couple of quarters of kind of results. So we're going slow, but obviously our acquisition cost is pretty decent there, but we -- there's no new big numbers. The numbers are kind of more in thousands than tens of thousands, and we want to kind of keep it this way. But we might -- it depends the results, we're testing the conversion rate and acquisition costs in different countries. Then based on that, we would create a plan for next year. And this year, we don't plan to re-spend any money on personal language marketing. We're still learning from that how responses are per region and also how -- the content what we launch in our original language compare like dubbing or subtitling. So we still have more to learn than we -- before we want to spend more -- some meaningful marketing money, because we don't need it for the million.

And the next question will come from Steven Frankel with Dougherty.

Maybe you could give us a little more insight into what tactics you're going to use to target and capture those higher lifetime value subs that are interested in areas like Seeking Truth? Are you going to put out more long-form free content like you tried last year or what other things might you do?

Well, the first move, we actually brought in, we -- it created actually a new department, which kind of in marketing but separate, we kind of call sales. And it's really organized is we have this different -- we started the process a while ago what we call ambassadors when we could actually pay people like our hosts, so our best customers for any people they recommend, we retain on a regular basis. So it's like paying more in a way as we pay, let's say, Apple TV, as a percentage of revenue, which is obviously better for definitely for cash flow, because we don't have to pay like upfront like anywhere else because we pay as we go. But also it's much more payable to target and distinguish customers, so we can pay the ambassadors differently for the high-value customers. So that's one of the kind of the basic tool. But there's also more. We spent -- we kind of when we started, YouTube was a good channel for us. Then Facebook came with a better algorithm. Now YouTube or Google overall kind of use some of the intelligence to improve the searches on YouTube. So YouTube is coming back with kind of better means to target the customers, and also rather do channel to YouTube, we can go different sites. So we're -- obviously, the -- it's a little more costly because you have to spend time searching for this. Basically, you cannot do like 1 site like Facebook. So that's actually -- it's not that you pay per customer more, but it's more demanding internally since we're counting those people's time has kind of created a little higher cost. But those are the 2 primarily way how we can sort it out. But this in overall marketing across, it's a direction what Paul kind of is involved in, if you want to say anything about it?

Yes, sure. Steven, so I think as Jirka mentioned, that ambassador channel and firing that up is going to take some time to get it to build, but we expect that to contribute meaningfully. And then I think the other piece that we've talked a little bit about is this community focus that we're looking at, and we've actually been part of the sales initiative is actually looking at how do we build a better member referral program. Because if you think about our affinity groups and the people that are really passionate about what we're doing, they will be the best source of future customers. And we haven't really done anything to date to fire that up. So this is all strategic planning that we're kicking off right now for the rest of this year.

But because we're kind of ahead of the plan and targets, we have this nice place to always be. So we have time to kind of tweak this program without having any rush or anything. So we would be kind of using that extra room what we have because still the cost of the customer is lower than we budgeted. So allows us this nice time to be able to look for more deeper options.

Great. And if you could update me on your organic traffic trends?

The organics, we probably talk to you year-to-year of the organic or nonpay channels. They were like, they increased from 30% to about 40%. It's kind of now increased over 40%, and so more recently it's kind of the low 40s. And we obviously would like to grow. And it's still -- it's a very nice increase. And even the pace kind of staying very high of the new acquisitions and obviously, we'd like to keep increasing the trend, but now being in 40s, it's very promising.

Great. And on the CapEx, Paul...

That's what -- that's one of the reason why our overall cost goes down because we have more of these organics.

Great. And Paul, I don't want you to be left out of the party. So just a couple of numbers. Stock-based comp in the quarter and cash flow and CapEx?

All of those will be in the Q that is being filed as we speak right now from the cash flow perspective. Stock-based comp for the quarter was at $224 million.

And our next question will come from Darren Aftahi with Roth Capital Partners.

First, can I go back to your commentary on gross margin. I'm just kind of curious why you're assuming that number will be kind of steady state as you grow your subbase. Are you going to be investing meaningfully in content or is there kind of an offsetting cost there?

No, as Jirka mentioned, we tie the dollars that we're investing in the content to our subscriber growth. So we have pretty high visibility, and so what we have invested into what's going to be rolling into the P&L over the rest of the year. And any -- there's not really major deviations from that, which is what gives us that confidence to say that, that's the level that we're going to maintain at. And as I've previously spoken on the calls, we have annual contracts locked in with our technology partners on the screening side of things, so have relatively high visibility through the majority of this year, like into Q4, as it relates to that piece, which gives us the confidence to be able to make that statement.

Got it. And then on customer acquisition, I know you guys are focusing more on higher cost, but can you just kind of give us a real understanding of the CAT on Truth Seekers, say, versus Yoga? And then that updated TAM you've put out, how -- what composition of that is Truth Seekers and then how much of an emphasis is that kind of from a priority perspective over the next 12 to 18 months for you guys relative to just growing the subbase?

Right now, it's the transformation kind of -- because it was our new channel, we really focused on it this year. So basically, it's very close to the Truth Seekers now. The Yoga is still higher because we started with much higher number. Originally, we started like 80% Yoga. So that's decreasing. However, when we say seekers, that's not necessarily just the Seeking Truth, the seekers are people who stay -- reach kind of the state in a life and they are actually seeking out. They want to be part of something. You can be a transformation seeker per se. The seeker term on its own is kind of separate from Seeking Truth content. It's just the people who rather than being marketed to, they are actually actively seeking out then you just need to kind of let them know we're here. So as far as the mix between channels, I expect the channels being kind of even -- close to even by end of the year. And then depends if you add different channels, that obviously not only bring you customers, but also because we classify them by behavior, it might per se cannibalize the other channel not that -- because we lose them, but we'll classify them or something else because majority -- let's say, we have somebody we call transformation, but the majority of their viewing will be in the future in Alternative Health. We will classify them in Alternative Health. So if you launch new channel, there is some natural lawyer kind of finance level and people migrate to the new channel as a primary user of that channel. So for us, if they're 50% in that content what we classify, I'll say it's Alternative Health, we will classify them Alternative Health. So depends what we launch. It will take some other channels down if we do something close to Yoga. Some yogis go too, if you do something close to some historic -- history like pyramids and some kind of the ancient predecessor of the humans. It becomes just differently. So it's -- we don't really have per se a plan how much of each we want to have. We're obviously focusing on getting million subscribers. And long term, if you launch a channel, especially something like our healing, we believe that it will get to the same percentage of the -- that the break will be pretty even between the channels. That's kind of the plan.

Got it. Just one last one, if I may. I know you do testing -- small testing in international markets with marketing. Is there anything that you're seeing from those tests in conversion that I called out Australia and Canada, that would get you to spend more aggressively over the next 6 to 12 months internationally?

Well, I think we're already -- as Jirka alluded to, we're already seeing that traction. So now it's just a matter of continuing to increase the dollars from a test size perspective to make sure that, that conversion rate and CPA holds true as you ramp up the dollars, right. Because when you do small dollar testing, you could not -- may be not -- don't get the same conclusion. So that's part of what we're looking at right now. And we really do all of this testing to help us better identify how we want to budget and plan for Q4 and 2019, which are really kind of the peak deployment periods from a capital perspective as it relates to customers just because they're more prone to sign up. So we'll be learning through the summer as it relates to those things and then deciding how much we want to allocate away. But I will say, as Jirka mentioned, I do meet on a regular basis with our team and we're making real time spend allocation decisions based on the results that we're seeing. So while we don't have a plan to make a major shift to it, if it continues to grow, we'll react to that accordingly.

I think the international, as we kind of do the testing, obviously, as we see good result like Australia, we probably put some more dollars. It's kind of interesting in a country like New Zealand, even small might be important to us from marketing. But overall for us predictable is much more important than try to kind of overallocate somewhere just because it's short-term better, because we're already planning what happen after the million or the next million or 2 subscribers come from. So for us the predictability is more than try to -- as for us, 7 quarters, we tried to be as accurate. This is kind of we're doing it based on kind of mathematical approach and it's for us to more to tweak the model, so we optimize it. Like now, we're ahead, so we say, let's bring better customer rather than keep dropping the cost. Because we're already ahead where we plan to be. So I think it is optimizing the model, it's really key for us for the future as we kind of look at go to like 10 million customers. So for us to create the smarts to go beyond million, it's kind of the key issues for us in the next 1.5 years.

(Operator Instructions) Our next question comes from Matt Sweeney with Laughing Water Capital.

So just a question. I noticed in the local filings, the kind of government filings that you guys had applied permission to develop some sort of event space. Just wondering if you just kind of talk about that in terms of how you see that developing? What the costs might be? And what the time line might be? And what kind of -- how that might help drive other assets of the business as well?

Yes. We kind of -- there was -- actually, we tried to get it for a while, we have to get rezone and also we don't want to -- that was one of the reason why we took a little more capital on the offering. We talked about it for a while. The -- it's a little premature for us to talking because we didn't yet start to build it even. But our thought is that we will take our premium what we call host and do something what we call seminars with them for 3 days live. And that would be like extra pay. We did 2 tests and when we charged, like, first we charged $300 for the 3-day stream; second like $450. And we get like $550,000 revenue with -- for like $30,000 cost. And so we would kind of create something like that and look at potential launching some premium subscription channel -- no channel, premium subscription. So will be like upscale of our subscription, and you can get this for free, and you will be extra pay. But it's a thought. We didn't really kind of decide it and we're doing it and you're not going to see anything in this year. But trying to answer your question, when you're sort of filing it's a little premature, but it's our thinking. I hope I answered your question.

Sure, yes. Just -- I mean, it's obviously -- I guess, the right way to think about it is a big picture potential project and this extension it makes sense.

There's not much costs sort of the building it -- a little bit building into our campus. So there is basically just a construction, but there is a lot of operating cost of that. But it's basically idea to create a premium over subscription, and so today average person pay $100, and this would be like $300 per year and include this. So obviously much better ARPU and the gross margin will increase as well.

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.

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

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.