Gaia Inc (GAIA) 2022 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, 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, competitions, loss of key personnel, price changes, membership growth, brand reputation, changing consumer preferences, customer acquisition cost, member retention rates, acquisitions and other risks and uncertainties detailed from time to time in our filing 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. The revenue for the first quarter increased 15% to $21.8 million from $18.9 million. Member count increased to 823,000 with average revenue per member increasing from the year ago quarter as our $299 annual premium subscription as well as Yoga International $20 per month pricing will continue to drive up our ARPU during the year.

EBITDA improved to $4.1 million from $3.5 million. We improved our gross profit per employee to over $590,000 from $530,000 a year ago. Net income from continued operations was $0.2 million or $0.01 per share compared to $0.4 million and $0.02 per share in the year ago quarter. The decline reflects the incremental intangible asset amortization and higher operating expenses from Yoga International during the first quarter as the acquisition was completed only in late December. Gross profit per employee at Yoga International was only $188,000 during the first quarter, but it's already almost double as of now.

And Paul will talk to you more about that right now. Paul?

Revenues were up 15% to $21.8 million for the first quarter of 2022. Gross margins declined slightly to 86.7% for the first quarter compared to 87.1% for the same period in the prior year. The slight decrease is primarily due to additional content amortization as a result of the Yoga International acquisition completed on December 22, 2021.

Our net adds for the quarter were impacted by 2 factors that at this time we believe are transitory. First, our direct member base, which represents over 80% of our revenues, has continued to benefit from improving retention dynamics. However, we experienced an increase in the cost of digital advertising, which impacted gross adds. While we do not have any direct exposure to the events transpiring overseas, we have seen disruption in the paid media markets that began in early March.

Second, we experienced net contraction during March on our channels available via Amazon Prime Video. We believe it was the result of the increase in Amazon Prime pricing and not specific to Gaia based on third-party data we receive, which showed all premium channels on Amazon Prime Video experienced elevated churn during the period. As a reminder, we strategically limit our exposure to third parties individually and in the aggregate to mitigate the overall impact of this type of scenario.

We saw an increase in average revenue per user to $8.85 per month during the quarter because of our Events+ premium offering and the addition of the Yoga International members at a higher price point. As a reminder, Events+ is $299 a year, and Yoga International's pricing is $19.99 a month or $199 a year.

Based on the media reports following the entertainment-based platform's recent earnings releases, we believe our strategy to focus on increasing average revenue per member via these offerings and scaling up our marketing efforts to the Spanish, French and German audiences in the second half of the year will allow us to continue to grow revenues and cash flows despite headwinds in the overall domestic streaming market.

Total member acquisition costs during the quarter were $8.6 million or 39% of revenues compared to $7.6 million or 40% of revenues in the year ago quarter. We have targeted customer acquisition spending as a percentage of revenues at 40% since July of 2020. As a result, the first quarter of 2022 marks our seventh consecutive quarter of double-digit revenue growth while maintaining overall profitability.

During the first quarter of 2022, selling and operating expenses, excluding marketing and member acquisition costs, were $8.2 million or 38% of revenues, and corporate and G&A expenses were $1.8 million or 8% of revenues. As a percentage of revenues, they are both in line with the year ago quarter.

But the first quarter did include elevated expenses related to Yoga International. However, in mid-April, we implemented cost rationalization plans to better align expenses with revenues going forward. We have identified other areas to reduce expenses and increase operating efficiency, and we'll be implementing these over the coming months.

EBITDA was $4.1 million or 19% of revenues in the quarter. We have continued to grow EBITDA on an absolute dollar basis since the second quarter of 2020 when we turned positive on this metric. Net income from continuing operations was $0.2 million or $0.01 per share compared to $0.4 million or $0.02 per share in the year ago quarter. As Jirka mentioned, the reduction was primarily due to increased intangible amortization and elevated operating expenses from the Yoga International acquisition.

Overall, net income was $0.1 million, which reflects the impact of the loss from discontinued operations associated with the legacy Yoga International transactional course sales business that we exited as part of the acquisition.

Our cash balance as of March 31, 2022, was $8.4 million, which reflects an overall reduction in our payables balance of $2.3 million from year-end.

As we look into 2022, we continue to be focused on executing the year on $100 million revenue run rate while maintaining profitability. We continue to be excited about the opportunities for Gaia to benefit from our global scale and the financial discipline we have continued to demonstrate while growing revenues and maintaining profitability.

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

(Operator Instructions) And we'll take our first question from Eric Wold, B. Riley Securities.

I guess, Paul, first off, do you mind repeating the dollar amount and the percentage spent on advertising in the quarter? I apologize if I missed that.

Sure. It was $8.6 million or 39% of revenues for this quarter.

And can you give us an update on kind of how ad rates are trending now versus what you saw maybe on average of a trend during the first quarter as well as the year ago period? Any kind of advanced read on how those might shift near term or through the end of the year?

Yes. Last year, we were benefiting still from the COVID period and the lockups of the -- in the winter before we transition to spring. So it was really at a low level last year. This year, we saw some relief as we were going into February. And if you recall from the earnings call at the end of February, we said we'd seen some relief. But then in mid-March, that kind of went out the window and things have gone haywire.

And to be honest, it's extremely volatile. Some days are good, and some days aren't. So I don't have a way to really give you a read on what the cost of the media is doing, but what we're doing internally is really focusing on leveraging more awareness and more e-mail conversion marketing because those are ways that we can control the cost of customer acquisition and disintermediate the need to just pay for impressions to get conversions.

And then obviously, there's been a lot of focus on kind of some of the SVOD platforms kind of hitting a wall recently with subscriber growth and some even contracting. Maybe give us a sense of kind of what you're seeing within your subscriber base in terms of those that -- I know you said retention has been strong. Maybe those that are not renewing, is that tending to be more of the -- from the monthly subscribers that joined during recent years during the pandemic? Are the longer-term subscribers kind of still sticking around? And then kind of what are you seeing with kind of viewership trends between those various cohorts?

Yes. There's a couple of questions in there, so I'll unpack it. So the first one is on retention trends. And we've consistently seen the 6-plus month members, whether they're monthly or annual, continue to be very sticky and renew at a very high rate. I'd say the majority of the challenge that we're seeing combined with that high cost of paid media is just the initial 6 months of monthly membership being the period where people are coming and trying or potentially never intending to stay for a long period of time.

I think one of the things that we're seeing industry-wide with all of the new services that have come online, people are dabbling, so they'll sign up for a month, watch then move on to the next one. And I think that's why it's really important for us to continue to talk about our mission and the fact that we are member-supported and that we want to be able to reinvest our subscriber dollars back into content creation so that we don't need to expand into other opportunities for monetization that might put the mission and vision at risk and ultimately put those really sticky retained members at risk as well.

So for us, it's really about the right customer acquisition costs and then doing everything we can to ensure that they can find the content that they're looking for on Gaia that they can't find anywhere else and let them know that they found a home. That's really what we're focused on internally given how the paid media markets continue to be very volatile.

I think the last question that was in there was on viewership trends.

Viewership, yes.

Yes. So we've been looking at that. We've had to go back 2-plus years to really normalize out the impact of COVID and see how things are behaving. And I'd say, generally, we're back reverting to the mean in terms of where we were pre-COVID as it relates to daily and monthly viewership. And it's obviously off the peaks of what we saw during COVID, but I think that's to be expected with people spending less time in front of screens and potentially having the ability to get out and do things that they weren't able to do really for the past 1.5 years, 2 years.

And next, we'll move on to Mark Argento with Lake Street.

Just a couple of quick ones. Talk a little bit about how you guys are thinking about cash flow and kind of the conversion from adjusted EBITDA to free cash flow over the next few quarters.

Well, you saw that even in the first quarter, when we have like extra expensive expenses with assimilating the acquisition, what we did pretty much in December 20, so a lot of that kind of hit in the first quarter, but we still could stay profitable with that stuff. So it's our goal to stay on that positive line.

And there's really a question of how aggressive you want to be per se in international markets, which we will try to look at. But our general thing, it's we want to stay on a positive trend.

Yes. I'd say if you unpack it a little bit further and actually look at the dynamics of -- between the P&L and the cash flow statement, EBITDA or adjusted EBITDA, whichever measure you want to use, tracks pretty closely to our cash flow from operations line item, absent things like what happened last quarter and into this quarter with the acquisition and the timing at the end of the year.

So -- but generally, that's how we look at the model going forward, is that EBITDA should approximate cash flow from operations. And then as we have pegged our content investment as a percentage of revenue in roughly the 18% to 20% range, that covers the investing side.

And so from a tax perspective, given our NOL positions, barring some unforeseen change in the tax regime, we won't be a cash taxpayer meaningfully for several years. So you can see how the P&L metrics flow through into the cash flow dynamics and allow us to operate slightly better than breakeven or better than breakeven as we continue to grow revenues.

Great. And just refresh me, when you think about content, CapEx for content and, specifically, what are you guys typically budgeting for that as a percentage of sales?

All in, including the royalty piece, which flows through the P&L as 18% to 20% is roughly what we've pegged it at. So what that means on the cash flow side, you can see how that's been pretty consistent. If you back out the acquisition-related payments, you're somewhere in the $4 million to $5 million a quarter range just depending on the time of the year. Q4 is obviously light because of the holidays, and then Q1 is a bit heavier as we ramp up our production of our ongoing episodic weekly shows and try and get as many of those in the can for the year as we are able to in the first half of the year.

Yes. I want to reiterate here that you don't really have any of this pressure on content cost, as you see at Netflix and the other entertainment players. So it didn't affect us at all. .

So it's more, there, it's actually very positive how we structure the business because we don't have very -- pretty much control of what's happening. We didn't see any basically increases over the last several years unless we decide to do that. And that more goes to increase production, like having more animation or better music and stuff like that, then would be related to talent.

Last one for me. On the premium offering, looks like you guys did a few events in the quarter. What's the -- has that schedule picked up more aggressively? And how do you see those types of customers long term? Do they tend to stick with you, come back year-after-year? Or what -- and then are you able to leverage that content and drive subscribers off of the traditional platform? That's it.

Yes, you bet, Mark. So yes, we had an event in March that was sold out for in-person, and it was a slightly different format. We did more of a conference-style format, so multiple speakers over the weekend versus just one speaker. And we saw that, that had quite a bit of draw. We sold out our in-person tickets really quickly.

One of the things that we have acknowledged, though, is that we don't want to be in the live events business for the sake of being in the live events business. And so we're focusing on quality of those events, not frequency of those events.

So we'll probably do one a quarter from here on and this higher-end sellout with content that fits into the overall offering. And today, I think we've had 14 or 15 completed events. So the library of content that's available to those Events+ members is starting to have a stand-alone value independent of the new events that are coming.

That all being said, it's still relatively early in the life cycle there. And again, COVID has impacted it for the past 2 years. So I won't speak to long-term trends, but I will say, in the short term, we are seeing a decent amount of renewals and a lot of interest in the content that we're putting on to that offering. And we also have some ideas in terms of how do we think about positioning that so that we can get net growth from -- straight to Events+ sign-ups, whereas, historically, we'd been focusing primarily on upsells of existing members.

And overall, this premium subscription, looking back, I think it was great that we introduced it. So even if you separate it, like separate business, it's already solidly profitable. And the margin would increase, and you kind of see that it's also helping obviously our overall ARPU. And as Paul said, we kind of rely more on upsell, but we kind of see a lot of people kind of go directly there. So because -- it obviously includes the regular subscription in -- if you buy the premium subscription.

(Operator Instructions) And next, we will take Thierry Wuilloud with Water Tower Research.

A couple of questions. Any color -- any further color on the -- on how the Yoga acquisition is going? Obviously, you have now a few more -- a couple more months of experience with the business. So anything additional you can share?

Yes, sure. For those that weren't following along, when we bought it, we were able to get a pretty good price on it as a result of them being in a pretty significant unwinding from the growth that they'd seen during COVID. So when we looked at it from January to December, they were down about 25% on a revenue basis. Since we've acquired it, we've stabilized the losses and have now started to see slight growth on the revenue side for the 3-plus months that we've been responsible for it.

But what we're 100% focused on internally is integrating the back-office system, starting with the subscription management platform so that we can have line of sight visibility into that part of the business the same way that we do in our legacy business, and that should be completed somewhere in the late Q2, early Q3 time frame. And once we have that complete, then we'll be able to really start focusing on growth initiatives there.

It's obviously the same product and engineering resources to do that work that might do other work to help drive significant growth, but we see it as a strategic risk to leave it standing alone too long. And so that's why we focused on getting that done first.

Great. Questions on your international opportunities. When you enter a new market there, do you need original content or you need to do translation of existing content? How do you go about that?

Yes. So I'll start, and then I'll let Jirka add a little bit of color here because he's really been driving the international content side of things. We've opportunistically acquired libraries over the past 2 years in Spanish and French to supplement the content that we've been doing dubbing and subtitling on.

For German, we've been looking for content to acquire, but we haven't been able to find anything that -- in size that meets our requirements or is priced appropriately. And so we've started producing original content in German both in terms of the long-form content as well as Yoga content, which is why German is going to be a little bit behind Spanish and French as it relates to growth.

I'll let Jirka add any color if he wants there.

Yes. I mean overall, international, you see the Netflix is well over 2/3, and actually, it's a segment that's growing for them. We still can grow from obviously domestically because we have still very little of market share. So we not necessarily need to do that, but we kind of want to go there strategically.

Yoga International get about 46% of the members internationally. And what Paul said about Yoga International remaining self-standing, we want Yoga International be a separate business but not necessarily to have per se separate systems or we bring them closer together.

But there's -- definitely, we probably would like to enter over the next couple of years the market like, say, Portuguese, especially Brazil. But main focus right now, it's Spanish, French and will be soon German.

And we'll move on next to Bob Evans, Pennington Capital.

The cash flow question was -- my cash flow question was answered earlier. It sounds like free cash flow and EBITDA are somewhat similar. Given that you generate, call it, in the ballpark of $1 or more per share of free cash flow and you're trading at less than 1x current year sales, anything -- any more thoughts strategically in terms of a more aggressive buyback or use of capital to take advantage of the company's current valuation? It's as cheap a stock as I know that has subscription revenue at this growth rate and cash flow generation.

Yes. I definitely understand the question, Bob. We won't comment on the specific share repurchase, but I will say that we see an opportunity on the cash flow to reinvest back into revenue growth. And one of our internal goals is to get over that $100 million mark because we do feel that part of our valuation is tied to the smallness of our business. And our focus is to get bigger so that we can be recognized for what we're doing from a financial discipline perspective, which is in stark contrast to the majority of the other streaming players that are of a similar size as ours that are still heavily losing money and cash and funding it from equity or debt from outside investors.

So that's really our internal focus. And even if the valuation is attractive, we feel like that there's better opportunity to put the money to work to drive revenue growth rather than pull back float at this time.

Okay. So you're going to prioritize revenue growth over float for now?

Yes.

And we'll move on to [Ian Stevens].

Can you comment on the recent departure of Brad Warkins?

Yes. It wasn't recent...

It was more than a year ago, and Brad with -- worked with me for 20-plus years. And after 20 years, we talked about it for 2 years, and so he kind of felt that would be his kind of close retirement age and felt like, okay, we should maybe talk about how -- so it's like for us a long time ago and went pretty good.

Yes. And I think what you're commenting on is the news that he took a new position. I'm still a close friend with him. And what he realized is he wasn't ready to retire. So that's why he's back in -- put his hat back in the ring and he started his new role. But from a Gaia perspective, it's been over a year that he's left the Gaia employee base. He's still a friend of the company, but it's not anything related to the news of him taking his new role.

Okay. Understood. And it was the recent news that I had seen. There was -- going back a few 10-Ks, there was sort of a hidden asset that I think was around a $10 million valuation, and I don't think that there have been recent updates to what that was or when you were going to reveal more about that. Is there any timing on when we can know more about that?

We don't really update on that, but I think you would kind of see some kind of update by end of the year.

And that does conclude our question-and-answer session. I'd now like to turn the call back over to your host, Jirka Rysavy, for any additional or closing remarks.

Well, thank you, everyone, for joining, and we look forward to speaking with you when we report our second quarter, which will be in early August. Thank you.

Thank you. And that does conclude today's teleconference. We do appreciate your participation. You may now disconnect.