Gaia Inc (GAIA) 2022 Q3 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 third quarter ended September 30, 2022. 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 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, future losses, competition, loss of key personnel, price changes, membership growth, brand reputation, changing consumer preferences, customer acquisition costs, member 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, sir.

Thank you, and good afternoon, everyone. Revenues for the 9 months of the year increased 6.3% to $62.5 million from $58.7 million. During the quarter, similar to the previous quarter because of the challenging market environment and the weaker member acquisition part of the year, we pulled back on our marketing spend. Lead together with the tail of increased departures of members that sign up during COVID lockdown in July and part of August, caused a slightly negative quarterly revenue growth.

The revenue for the quarter decreased 2.5% to $19.9 million and member count of 776,000. The challenging marketing environment is now subsiding. The COVID lockdown member cleanup this year actually put us -- put our member base to a very good place. Now about half of our direct member base is with us over 2 years where the member retention is about 6x higher than for members they came during the last 90 days. This provides us much more favorable math for the near future, and it's a very good base for our growth in next year.

Despite a challenging macro environment, we managed excluding the nonrecurring charges, to deliver a positive earnings and adjusted EBITDA of $4.1 million, which is 21% of revenue. During the last 2 months, our effort in French market started to bear fruit, and we expect the German market to follow later this month. We also executed a new agreement to launch Gaia on Amazon Mexico. Gaia also selected to become part of new Google subscription initiative YouTube prime time that launched last week, which is -- will be similar like we have on Amazon that -- the price of the offering, it's the same for Gaia.

Our recently achieved technology independence where we're now able to operate our business on Gaia hardware infrastructure but also make it easier for us to introduce an additional monetization of our member base with our new Gaia marketplace initiative we plan to launch next year. As a company, we have no net debt and the replacement value of the 10,000 titles we fully own and the future cash lifetime value of member base is over $300 million. And Paul is going to talk more about the results. Go ahead.

Thanks. Revenues were down 2% to $19.9 million for the third quarter of 2022, but up 6% to $62.5 million for the 9 months ended September 30, 2022. Gross margins declined slightly to 86.7% for the quarter compared to 87.1% for the same period in the prior year. The slight decrease is primarily due to additional content amortization compared to the previous period.

While our subscriber contraction improved from the prior quarter, we did experience our second sequential quarter of net subscriber loss ending the quarter with 776,000 members. The decline in the member base was primarily driven by reduced marketing spend during the quarter because of a challenging marketing environment. We also experienced elevated cancellations in March through July for members that joined us during the peak COVID period in 2020 and 2021.

While these cancellations began to dissipate in the second half of August, the reduced demand during the summer, combined with these elevated losses in the first half of the quarter impacted both our revenue and member growth objectives for Q3. Marketing expenses were $7 million or 35% of revenues during the quarter, which is down from $7.8 million or 39% of revenues in the year ago quarter.

As part of our focus on improving the returns on our advertising spend, we've begun evaluating the efficacy of our marketing initiatives on 1-month and 3-month retention levels, not just initial sign of volume and CPA. While we are implementing this approach, it is allowing us to reduce our overall marketing spending as a percentage of revenues to balance our expenses against revenues to ensure we maintain our financial independence.

Our focus remains on attracting high potential lifetime value members to find Gaia and become a member. The results of this will take some time to be reflected in revenues and cash flows. While this is creating some pressure on near-term revenues and member numbers, we believe the long-term cash flow generation will more than offset the short-term impacts.

We have continued to scale up our language marketing efforts and have seen good early traction in both our French and German audiences over the past few months with both audiences growing 20% plus sequentially during the third quarter. During the third quarter of 2022, selling and operating expenses, excluding marketing and member acquisition costs were $8.6 million or 43% of revenues, up from $7.7 million or 38% of revenues in the year ago quarter.

Personnel-related costs have remained flat year-over-year, with the increase is driven primarily by increased technology-related operating expenses tied to our business continuity initiative that Jirka mentioned to reduce dependence on third-party service providers that we completed in the second quarter. With the initial phase of this project completed, we are now beginning to optimize these expenses and expect to reduce them as a percentage of revenues over the next few quarters.

Corporate and G&A expenses were $2 million or 10% of revenues during the quarter, which is up from $1.5 million or 8% of revenues in the year ago quarter. The increase is primarily related to elevated legal fees. As you may have seen, we disclosed today in our 10-Q that we anticipate a settlement with the SEC that would resolve an ongoing investigation and eliminate these related legal fees. Under the settlement framework that we've agreed to with the SEC staff, the company would consent without admitting or denying any findings to an administrative SEC order that would find that in our April 29, 2019 earnings release and earnings call, we misstated the number of paying members as of March 31, 2019, when Gaia extended a free month of service to some members while we were implementing a new billing and subscription management system.

The administrative order also would find that we failed to comply with SEC whistleblower protection requirements when we terminated an employee and used incorrect language in our form severance agreements with other employees. Our agreement in principle with the SEC staff would require Gaia to pay a $2 million penalty over the course of the year. The anticipated settlement is based on negligence rather than intentional conduct. There's no guarantee that the settlement will be finalized and approved, but we concluded that our agreement in principle with the SEC staff counseled in favor of disclosing and accruing the anticipated settlement as a loss contingency.

Just to be clear at the outset, we won't be saying anything more about the SEC matter at this time. We direct you to the disclosure in the 10-Q filed today, and we will not be answering any questions about it on this call. EBITDA was $1.8 million or 9% of revenues in the quarter and marks yet another consecutive quarter of positive EBITDA. Adjusted EBITDA, which excludes the settlement accrual and share-based compensation expense was $4.1 million or 21% of revenues.

Net loss was $2 million or $0.11 per share compared to net income of $0.6 million or $0.03 per share in the year ago quarter. Excluding the impact of the settlement accrual and associated legal fees, we would have had slightly positive earnings for the quarter. On August 25, 2022, Gaia entered into a $10 million revolving credit line facility with KeyBank. As of September 30, 2022, our cash balance was $10.8 million.

As a closing note, I would like to announce that we launched a new distribution partnership with YouTube last week in connection with their launch of YouTube primetime channel. This will allow us to seamlessly tap into the large audience that engages with YouTube and Gaia content on a monthly basis. As this new service is rolling out to U.S. YouTube consumers during November, we don't expect this to have a meaningful impact on the fourth quarter but we are excited to be a part of the select group of premium content channels that were invited to be a part of this program.

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

(Operator Instructions) We'll take our first question from the line of Mark Argento with Lake Street.

I just wanted to dig into the sub base a little bit, 776,000 subs, which actually ended up being a little better than what we had in our model. Could you talk a little bit how much kind of the COVID cohort, I guess, we'll call it, remains in that sub base? And maybe if you could drill down a little bit what I think you saw in August, mid-August kind of a slowdown in terms of the churn rate there a little bit. Maybe you could drill down on that a little bit for us, please?

Sure. So the main impact was from the annual members that signed up during that time period. So now we've been through 2 renewals with the initial COVID cohort and 1 renewal with that spring 2021 cohort. So we're not going to give specific numbers. Jirka gave you the number that over 50% of the member base -- direct member base is over a year old now.

2 years so.

Two years old now, sorry. So we're starting to get into the stickier retention ban. And so our feel based on looking at those members now, that they're starting to behave like our regular members that weren't COVID cohort. So I don't know that we would draw the distinction any longer.

Yes. I think it's kind of -- the way we kind of try to obviously look from all the different reports and different companies and general kind of wisdom conclusion for most of the subscription company was that you would lose about half of the people who you get through COVID as basically the additional members or someone in the magnitude, that's kind of when we look what actually we kind of lost between probably it started March '20 and went to second part of August.

You kind of see that there was like 50,000, 60,000 members -- that subsided actually end of August, very much for us. Like when I kind of look at week to week right now, we're actually in a growth period again. But how would for quarterly go, but it's clearly subside that trend of the bleeding. But it was, obviously, for the last 6 months, it was difficult to 5 months. But it's -- you kind of see it in all the subscriptions.

So we kind of believe it's beyond us. We're not going to really talk about it any COVID related members. I think we're back to Real. As I kind of said, we have because our member base because of this mature, so a lot of people who signed before COVID becoming a big part over half of our base. And we have probably 2/3 of people more than 1 year. So it's a much better base to go forward. So we're looking forward to grow next year.

Got it. So yes. So in terms of expectations in the toggles here, just kind of if you can start adding subs, it becomes cost effective. And I'm assuming CPMs are coming down, so that should become a little more favorable, will acquire a customer online. But for the time being, kind of maintaining course and speed and then hopefully get a little more aggressive next year? Is that how we should be thinking about it?

Yes. I would say just one clarification on that. I wouldn't say that CPMs will be coming down into Q4 with the holiday period In front of us.

Election.

And the election cycle that spends so much money through it. But we are seeing better efficacy on our spend. So we're able to, as I mentioned in my prepared remarks, focusing on 1 and 3-month retention, you really start to be able to bifurcate new members into high-value, high potential lifetime value and kind of the people that are just coming to watch 1 or 2 shows and then leaving relatively quickly.

And so we're really starting to focus our marketing efforts on the channels and the campaigns that are attracting the people that behave as the higher lifetime segments do. And as I said, that will take a little bit of time to play through, but you start to retain a lot more people through 90 days and 180 days that makes your net growth get easier as you mature through that.

Also in like August, when we kind of felt we threw the COVID things we refocus on our annual subscription. So our annual take we kind of increased from 20% to about 30% when we run through the summer. And obviously, that 10% of people who signed for a year would really help over first part of next year because there will be no real departures from it. So it's more of the modest than anything. But because we have several of these favorable parts. So we kind of believe that what happened, it's kind of behind us.

I think you saw it some other subscriptions. They're all getting a better place and start to grow. I think was pretty much from March to end of August when this period was for pretty much, I think all subscription services. As we look other people who kind of reach to us to be acquired something -- you kind of see the trend pretty much to everybody. So there was no exception to it. And it's -- we believe it's behind us right now.

And we'll take our next question from the line of Thierry Wuilloud with Water Tower Research.

Yes. I obviously have questions on the COVID impact, but I think Mark covered that with you guys. So that's great. You mentioned the French and the German market growing nicely. What are those viewers or those members consuming? Can you give us a little bit of flavor in that? Is it existing content? Is it strictly content that comes from their regions?

We have -- obviously, we all our bigger shows are dubbed -- we used to just up tiles, but now we dubbed all the content that obviously has much more traction. But we also filled.So we have maybe 1,000 unique members -- titles, what we have in each language or some lender magnitude. So it's a combination of those. And it's probably 30% of that content is what drives the value. And it's a little different is, for example, in France than it would be in Germany than it would be in Mexico.

So it's regional and also depends we might drive it like we have in France, we have a host, who is French for some show that we have a guy who's Argentinian for Spanish. So it depends if you launch kind of a new show in the language, say, in Spanish, they will increase the viewership. Same would be true in France and Germany. So we acquire a yoga company content there. And so now it's all online, so we can really market that primarily.

Okay. I find it interesting that yes, you can kind of somewhat expand the value of your content by just dubbing it and so on. So that's encouraging. You mentioned YouTube and Amazon Prime. Can you remind us the arrangement there or the economics if you get a member through that? Is it as valuable as a member that you get directly or not quite?

Yes. I won't speak to specifics of the contract language just because those are obviously confidential. But generally, when we look at it, we take net revenue, so we get our share of the revenue. The customer-facing prices are the same and we have some contractual provisions that allow it to stay that way. But really, it's about what's the net revenue.

And then when we look at it from an operating margin perspective, it's actually slightly better because the customer acquisition costs aren't there or a fraction of what we pay for the direct side and then also they're doing all of the customer service and technical delivery. So on a gross margin basis -- excuse me, on a net revenue basis, they're less than our direct customers from an ARPU perspective, but on an operating margin basis in the short term because we don't have the customer acquisition cost headwind for them, they're actually better.

And they help scale the audience, right? We have over 1 million people engaging with Gaia's content on YouTube, and this gives us a way to continue to merchandise and market to them without having to leave the YouTube platform. And so we look at it as a way to drive some incremental demand into our content that we've already paid for.

Okay. You also mentioned Gaia Marketplace initiative. Can you give us a bit more flavor there?

We don't want to talk about much because we didn't finalize the way, but we kind of have already something on a side. But you can look at it like you'll take some other online courses and ventures and let our customers -- if they buy through Gaia, they would have basically can buy that discount for being our member and also Gaia would receive meaningful revenue cut as well. So let's say somebody sells something for $500. And so our customer roughly might take 10% discount. And if they buy [Suga], guy get additional $100 net of cost.

Okay. So there'll be specific products that Gaia members might purchase through you and there's some type of revenue share with whoever sells the project that -- and that's something you can look at it next year.

Yes. It's like some people say we're going to create a model with advertising, is kind of a different way because we have a very loyal base. So it's -- a lot of people ask us for something like this from the vendor side. So we kind of said, hey, it's maybe time to monetize this. And it's kind of a benefit for the customers. They get a discount if they want to purchase through.

(Operator Instructions) We'll take our next question from the line of [Abba Horovitz] with Old School.

I was wondering if you could outline what the costs or legal costs were in the quarter and you said that should dissipate. Can you quantify that number?

Yes. It's roughly about $500,000 when you round it to the way that we present it. So that's why it's -- when I called it out in my prepared remarks, it's almost exactly the delta between last year's CG&A line and this year's CG&A line because we focus on maintaining as much as possible those expenses as we've continued to evolve.

Okay. So in Q4, will we see that $500 million come back on?

It's hard to say. We're -- obviously, we mentioned that we're in the stage of discussing the settlement. It's just a matter of when the timing of that comes to finalization because there'll obviously be some costs related to that. But included in that $500,000 is an estimate of what we believe will be to wind it down. So as long as it's not more than that estimate, we should be okay from an incremental expenses perspective.

Do you anticipate any extraordinary costs in Q4? Or should assuming the legal goes away? Is there anything else for the seasonality that isn't extraordinary cost in Q4? Or should it be very similar to Q3, the cost?

Yes. Unfortunately, I don't have a crystal ball as it relates to regular trend operating expenses it should be very similar. But obviously, there's 1.5 months of the quarter left. So I can't say definitively whether something doesn't arise that might cause some future actions. So I don't want to commit to anything that I can't really control.

Okay. Can you release how October went in terms of the business?

I'd say generally, Jirka kind of hit it on its head. We've seen that we're starting to tip from declining member bases to moderate growth, but the election was a pretty strong headwind when you look at the amount of dollars that were being spent to chase some of those midterm campaigns. So it wasn't blockbuster, but it's not declining.

Yes. The last week, obviously, as last week was the more heavy marketing for all the election thing, and we still managed to grow but it wasn't a big growth because the marketing, it's challenging, right? We expect that to get a little better. But again, we don't know. It's hard to see, but it's definitely a big improvement from the summer.

Okay. Fair enough. And just can you talk about how the acquisition is going in terms of integrating it into the company?

Sure. Great question, and that was already pretty dense in my prepared remarks, so I didn't put anything in there. But in September, we completed our billing migration. So now we're fully integrated on the billing and subscription management side. And now we're focusing our efforts on ramping up our ability to spend and grow the yoga specific audience now that the billing migration has been completed.

We've brought in someone who is an industry veteran to help lead that initiative, focused primarily on the yoga, the yoga teacher relationships that we have from Yoga International's long history, and we're working to get those reactivated and start pushing us forward into the back half of this year going into next year.

Okay. Wonderful. Any chance you guys -- I mean, I know we're in a pretty lousy micro bear markets for sure. And -- but the value of the company, as you mentioned, has $300 million of potential assets here, and yet it's trading for a fraction of that. I'm wondering, I know you're sort of cash constrained right now, but is there something is management considering buying stock in the market. Is this -- is there a way to somehow monetize something here to take out the value, which seems to be highly depressed at this point.

Yes. It's -- you're absolutely right, then if you see that and the $300 million, it's only the content and the member base, not counting real estate and technology and stuff. But it's far I don't think we can say what we plan to do. But I think if you wait a couple there is, you might see.

Yes. I think to be honest with [Java], the issue that we had until we were able to disclose this today was obviously that was information that we couldn't trade use to make public moves in the stock. So we've been constrained by that.

Yes, part of the other reason why we're moving towards getting to the settlement so that we can put it behind us.

Okay. Fair enough. Was this released in any of your filings that you were being investigated?

No. This is the first time that we've done it because like as I said today, it was tied to an information that's in the 10-Q, and you can read more about it, but this is the first time it's out.

I saw -- I looked at the 10-Q, I saw it in the 10-Q, but I didn't look back at the previous 10-Qs because this started -- it didn't start now, right? It started 2 years ago.

Yes. There was about the quarter was ending March 31, 2019.

Yes, we got to make sure we stick to what we said, which is we're not going to answer any questions on and it (inaudible).

But it didn't affect any quarter since 2019.

Okay. I just -- I'm -- there are certain times where you see a company and you realize how cheap it is. And on liquidation value alone, this thing is worth at least a few times what it's currently in the market is pricing it adds. And that's just the -- it's just something that I'm certainly paying attention to here. And I'm wondering why there's no one out there that sees this value and has led this thing drift literally to $2. I'm just curious if you have insight into that because it's just so odd in this kind of environment.

Well, I don't think we specifically our place to comment much on that. And -- but there's a lot of other companies, they kind of dissimilar. People -- we have a good chunk subscriber on Roku, if I look (inaudible) kind of not that different. But do you want to say something Paul?

No. I mean I think it's hard to speculate on what the investor appetite is. Jirka and I obviously understand the disconnect between the value of the business and the way that the stock is trading there's a lot of macro factors that are affecting that. Our focus is really just on continued execution, making sure that we can stay financially disciplined so that we're financially sustainable. And now that we have the technical independence behind us as well, that opens up the aperture for us to do some things that we've been a little hesitant to do because of the control that was -- could be exerted by some of our technology partners, particularly over the past few years. So I'd say we've been laying the foundation for the future now knowing it's a tough environment, and we're just continuing to focus on execution.

Okay. Just last thing. Can we expect you to be profitable? Is that the expectation now for Q4 that you should be profitable given that you won't have the good large chunk of those legal expenses and the fact that it seems you've bottomed out on the attrition aspect? It would make sense to me that you should be profitable.

I would say, yes, that is the plan to continue to stay profitable with 1 caveat that if we see a favorable marketing environment where we can add efficiently new members that meet our high lifetime value. We don't want to leave that on the table because this is one of our best quarters to add subscribers. But the plan is to continue to balanced growth with profitability and whether the winter that's in front of us.

Yes. But generally, I'd agree with Paul. We were profitable for the last several quarters, and we don't plan to change it. But we could see some opportunities for the open because of the market. But short of that, the plan is like that. So we would like to basically stay on this thing and to grow without generating cash or at least not bleeding one.

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, Kerry, and thank everybody for joining, and we look forward to speaking with you when we will report our full fiscal year 2022 in early March. Thank you very much.

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