Gaia, Inc. (NASDAQ:GAIA) Q3 2023 Earnings Call Transcript

Gaia, Inc. (NASDAQ:GAIA) Q3 2023 Earnings Call Transcript October 30, 2023

Gaia, Inc. misses on earnings expectations. Reported EPS is $-0.03 EPS, expectations were $-0.01.

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 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, 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, fluctuations 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 that we undertake, security and information systems, legal liability for website content, failure of third parties to provide adequate service, future Internet related taxes, our founders’ 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 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.

Jirka Rysavy: Thank you, and good afternoon, everyone. I am 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 about 16,000, ending with 790,500 members, which is above 776,000 we reported last year. So we more than recovered the 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 continued to grow steady, as it 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 the first 20 days without virtually any marketing cost.

And our 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 — the quarter of last year. We continue to generate positive free cash flow with the cash on September 30th 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 a new feature, it represents strategic expansion of our platform and it allows us to diversify our offerings and support the conscious life cycle of our members in a more meaningful way, whilst also improving ARPU, 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 decrease is 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.

A crowd in front of brightly lit video game consoles playing and enjoying the latest titles offered by the electronic gaming & multimedia company.

During the third quarter of 2023, we recorded a loss of $0.6 million or negative $0.03 per share, compared to loss of $2.4 million in the year ago period. The improvement was primarily driven by expense reductions and the 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 and 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 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 the strong growth of ARPU, which should be helped by our planned price increase for the new members in the 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 a company 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 his SVOD business FMTV into Gaia in 2019 and FMTV had the same mission as Gaia and it grew to over 600,000 subscribers without any outside funding, solely depended on James’ 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 it’s the main part of our mission statement and should be the final differentiation from all other video streaming businesses. I hope to launch Gaia Community after we reach our 900,000 annual member average milestone.

So this concludes our remark. So I would like to open to questions. Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from Mark Argento with Lake Street Advisors. Please proceed with your question.

Mark Argento: Hey. Good afternoon, guys. Just a quick question. It looks like your actual sub ads were a lot stronger than what we had been modeling. Can you just touch on kind of the environment out there from a subscriber acquisition perspective, the cost to acquire a sub, what channels you are seeing that success in?

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Q&A Session

Jirka Rysavy: Well, it’s — the environment, I think, it’s obviously better than it was last year quite a bit. It’s not fundamentally different than second quarter. I think the doubling our growth is pure internal. I think James helped a lot. We didn’t have really CMO. So he’s kind of functioning much more as a CMO than COO right now. And the cost of acquisition, it’s kind of the same as the second quarter, maybe a little cheaper on domestically and we saw little bumps in places like Latin America and the churn kind of bumped a little bit because of all the internal — mostly internal things with credit cards and stuff. But pretty much for 90% our business was more positive and I expect, as I said that, the member additions to increase again in next year from where we are right now, we still have definitely some room and I think that will be the main part of this thing. Do you want to?

James Colquhoun: Sure. Mark, I would also add that, we are focusing a lot, in my focus, especially with the growth and marketing team is on conversion rate optimization. So card conversion, guest 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 are 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 competition or otherwise, but it’s still coming down for us. And we are also working on our side, improving that with the 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 2024 year as well.

Mark Argento: That’s helpful. Thank you for that. And just pivoting to, I think you said, you are going to take pricing in Q2 of next year. What do you think in terms of the pricing, how big of an impact could that have in terms of the ARPU for the latter part of that year?

Jirka Rysavy: Well, we are not going to do the Q2. It’s going to be probably middle of Q3, somewhere closer to September. We are thinking about $2 for the new members. And we probably will focus on a monthly to move more people to annual. So we probably won’t raise annual. The annual takes rate now about 25%. And but that’s kind of the strategy. Not — it also we kind of hope that will help lower retention because people cannot come and leave and come on the same price. But — and also that’s one of kind of when I kind of said we will grow revenue 15 and members 10 is because we expect that increase price for new members will probably take a hit in conversion. So we wouldn’t grow revenue as fast. I mean, the members as fast as revenue. So but our goal is obviously the revenues — growing the revenues.

James Colquhoun: I think second to what Jirka saying, we would be grandfathering or grandmothering either or how we say it, our existing members. So there is a retention play there in that we can promise our existing members they 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 SKU 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 years and three years, much more beneficial for us as a brand and so we want to SKU 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.