The Beachbody Company, Inc. (NYSE:BODI) Q1 2024 Earnings Call Transcript

The Beachbody Company, Inc. (NYSE:BODI) Q1 2024 Earnings Call Transcript May 6, 2024

The Beachbody Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. Welcome to The Beachbody Company First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a Q&A session [Operator Instructions]. I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to our host, Bruce Williams, Managing Director of ICR Investor Relations.

Bruce Williams: Welcome everyone. And thank you for joining us for our first quarter earnings call. With me on the call today are Mark Goldston, Executive Chairman of The Beachbody Company; Carl Daikeler, Co-Founder and Chief Executive Officer; and Marc Suidan, Chief Financial Officer. Following the prepared remarks, we’ll open the call up for questions. Before we get started, I would like to remind you of the company’s Safe Harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company’s filings with the SEC, which includes today’s press release.

Today’s call will include references to non-GAAP financial measures, such as adjusted EBITDA, net cash and free cash flows. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our Web site. Now, I would like to turn the call over to Mark.

Mark Goldston: Thank you, Bruce. And good afternoon, everyone. 2024 is off to a strong start as we continue to deliver against our strategic initiative and remain steadfast in our turnaround plan. With our efforts thus far in 2024, we have some great news to announce. First, I’m thrilled to share that we beat the midpoint of our revenue guidance and achieved quarter-over-quarter revenue growth for the first time since Q4 of 2021. Second, we exceeded the midpoint of our adjusted EBITDA guidance and we’ve now delivered positive adjusted EBITDA for two consecutive quarters and today, we reported our highest adjusted EBITDA since going public back in 2021. And third, we reached a critical milestone of becoming free cash flow positive this quarter, once again a first for our company since 2020.

As a reminder, the goal of our turnaround strategy centers on; one, continuing to enhance our cash position and balance sheet; two, transforming our cost base and re-architecting the enterprise to dramatically reduce our breakeven point without compromising the core business model that generates revenue; and three, launching a series of initiatives to refine the business model and drive top line growth. In terms of where we stand in the turnaround process, we feel that we are considerably ahead of schedule. Let me walk through the details of our three key turnaround strategies. First is enhancing our cash liquidity and balance sheet position. We reported our first positive free cash flow quarter since 2020. During the quarter, we took additional strategic actions to fortify our liquidity position by engaging in a sales leaseback transaction and divesting a non-core investment, which resulted in a $7 million debt reduction.

As a direct outcome of that, our loan balance has been cut in half since I joined in June of 2023 from a level of $50 million to now $25 million. In April, we proactively amended our revenue covenants for our term loan with Blue Torch Capital. We finished Q4 2023 with a net cash position of $4 million. But at the end of Q1 2024, we showed continued improvement with positive net cash position of $14 million. This transformation in just one quarter is impressive and resulted in a $10 million liquidity improvement sequentially. Additionally, our amended debt covenant lowered the quarterly revenue threshold from $120 million, down to $100 million per quarter and this will last until December 31 of 2024 and then subsequently it will go to $110 million per quarter beginning in Q1 of 2025.

We believe this demonstrates that our lenders have confidence in our progress to run a positive free cash flow business at a much lower revenue threshold requirement. Second, we’re transforming our cost base and re-architecting the BODi enterprise to dramatically reduce our breakeven point. In what we believe to be a very short period of time, we have successfully reduced our revenue threshold from over $900 million in 2022 to less than $500 million in 2024 to be in a cash generating position, that’s more than a $400 million reduction in the breakeven threshold for the company. What’s important about that is that we built operating leverage into the P&L at the current run rate of revenues and believe that as our turnaround gains traction, we will drive significant operating profit over time.

We stated that we would generate over $250 million in cost savings in 2024 versus where the company was back in 2021, so a long process of improving the cost structure. And we’re currently at a run rate to deliver these savings in 2024 and this has been demonstrated by our Q1 2024 results. And third, we’ve developed revenue initiatives designed to drive top line growth, and we’re thrilled to announce that we grew sequential quarterly revenues for the first time since 2021. Looking forward, we’re excited about our existing and upcoming innovation pipeline, which focuses on expanding consumer access to our rich catalog of programs and we’ll also be exploring strategic partnerships and developing innovative marketing programs, which will expand the distribution of our nutrition business among other initiatives.

Our performance reflects many proof points that the strategy and disciplined focus of the turnaround plan we constructed after my arrival in June of 2023 are working, and we’re tracking ahead of schedule on critical milestone achievements. I like to create strategic imperative lists that focus on five key areas, and I’ve been doing that for decades in the companies that I’ve run in. I’m pleased to announce that the company has already achieved the five key strategic imperatives of the turnaround plan that we established after my arrival in June of 2023. Let me quickly review these five key strategic imperative accomplishments; one, we strengthened our liquidity position; two, we dramatically lowered the breakeven point of the company; three, we delivered positive adjusted EBITDA now for two consecutive quarters; four, we built substantial operating leverage into our P&L; and five, and thus far in 2024, we achieved our first positive free cash flow quarter since 2020.

As a reminder, we are still in balance sheet optimization mode, which means we will remain hyper focused on maximizing cash and liquidity. Therefore, we will continue to focus on executing our turnaround plan to optimize cash generation from our valuable asset base. We’re on track to build a company that not only delivers positive adjusted EBITDA and positive free cash flows, but also achieves the third element of the critical financial measurement of a turnaround, and that will be delivering GAAP net income, which will be our next key milestone in the impressive and might I say rapid turnaround of BODi. Now I’ll turn it over to Carl to discuss our top line revenue growth initiatives. Carl?

Carl Daikeler: Thanks, Mark. And thank you, everyone, for joining our first quarter earnings call. Achieving our first free cash flow positive quarter since 2020 is a major milestone in our turnaround, and we look forward to sharing more proof points now as every quarter unfolds. I’ll walk through our key revenue initiatives, which align with our overall mission to help people achieve their goals and live healthy fulfilling lives. First, we just launched our digital program purchase initiative that we’re extremely excited about. Think of it as the iTunes model of buying music but for fitness programs, where customers can now buy and stream programs from our fitness and nutrition library without a subscription. We believe there’s latent demand for our library of content from programs that were bestsellers and famous on DVD like P90X and Insanity to other popular programs which have never been on DVD like 80 Day Obsession, Lift 4 and Shaun Ts latest program called Dig Deeper.

We’re now giving consumers the ability to purchase the individual programs, which is actually the business model that propelled the business for 20 years. Each month, we’ll be offering additional titles from our library of over a 120 programs for sale in BODi’s new shop programs store at bodi.com. And we’re confident that this new initiative will cater to people who prefer to buy a specific program rather than subscribe to the entire library. We believe that we’re the only major player in home fitness who has a catalog that makes this kind of commerce viable. And again, we believe that expanding access to our content provides an extremely compelling marketing opportunity. then we can introduce those new customers to the benefits of our fitness and supplement subscriptions once they experience the efficiency of our tested approach to step by step training.

We’re in the early stages of marketing and refining the digital purchase program to maximize LTV by bringing new people to the platform and then upselling them additional programs or digital subscriptions and supplements. Next, within our nutrition business, we’ve expanded our sales channels and in March, we launched more aggressive marketing campaigns across our entire ecosystem, highlighting the superiority and quality of our formulations. These marketing campaigns will highlight a key product every month to our existing member base. And we’re further broadening our distribution by working with social media influencers to test and review and promote our nutrition products, and to transact through a simplified checkout process on social media platforms.

Looking ahead, we’re reviewing an extensive range of pricing and packaging and portion configurations to determine the best way to generate trials and conversions and repeat purchases of our nutrition products. We’re doing this across all our sales channels, including our network of partners, our direct-to-consumer marketing and now on Amazon. More news on this will be shared as we expand these activities in the coming quarters. Okay. Now moving to Amazon. We’re encouraged by the growth that we’ve seen this quarter. Sales on Amazon increased by over 50% both sequentially and year-over-year from Q1 2023. Now while this is starting off a smaller base, the growth gives us confidence that we have the right products, strong brand recognition and the right price points.

An athletic person entering a retail store, giving a glimpse of the fitness lifestyle.

We recognize that we have a real opportunity to expand access to our incredibly effective nutritional products and we’re seeing positive compounding results from our distribution partner on Amazon. And last, I want to highlight the progress we’ve made with reactivating our extensive database of former and prospective customers. We continue to execute against our strategy of sending targeted messages and special offers to drive conversion. But the process of methodically combing through this 0large database is taking longer than we anticipated as we test and formulate our messaging and formats for email and text messaging. We have a new team leading this project and we remain very optimistic that this will be a very effective customer acquisition and engagement tool that will drive LTV with minimal CAC.

I think it’s also important today to discuss weight loss pharmaceuticals and their potential related impact on body and the overall weight loss industry, if I may. Several analysts have published reports that fitness is not impacted by the weight loss pharmaceutical business but meal replacement and snacking consumption is actually being negatively impacted. The science is very clear that consumers who are using GLP-1 drugs need to augment that investment with fitness and nutrition to maintain muscle mass and prevent other side effects. Scientific studies have consistently shown that the best preventive medicine for overall health and longevity is exercise and healthy eating, and there’s our opportunity. BODi is the one comprehensive fitness and nutrition company that can truly complement this wave of pharmaceutical innovation, and we have not seen a negative impact from the adoption of GLP-1.

In fact, whether you’re a GLP-1 consumer or not, we remain the most effective and affordable fitness and nutrition solution for people. Okay. Now let me turn the call over to Marc Suidan to walk through the specifics of our first quarter financials. Marc?

Marc Suidan: Thanks, Carl, and thank you, everyone, for joining the call today. I’m very pleased with our Q1 results that we just released. As Mark and Carl mentioned, we have hit several key milestones in our turnaround journey. We remain on track to achieve approximately $250 million in cash cost savings in 2024, in line with our business re-architecture plan that we began back in 2021. I will now provide a review of our first quarter financials starting with revenues. Revenues were $120 million for the quarter, which was above the midpoint of the guidance range and an increase from Q4 of 2023. This would mark the first sequential revenue growth in the past eight quarters. Compared to the prior year Q1, revenues declined 17% year-over-year.

Digital revenue decreased 4% from the prior quarter to $62 million and decreased 5% year-over-year. We believe that digital revenue continue to be relatively stable. We ran a successful BOGO promotion, which stands for buy one year, get the second year for free, that resulted in strong cash generation. However, less digital revenues were recognized this quarter due to their BOGO promotion as we deferred digital subscription revenue over the two year period of the promotion. Our overall digital subscriber count was 1.2 million, of which a 100% are now on the BODi premium platform. Nutrition revenue increased 7% from the prior quarter to $56 million and decreased 25% year-over-year. This marks our first sequential nutrition revenue increase since Q1 of 2022.

We are pleased that our nutrition revenue grew this quarter sequentially, showing early signs of improvements within our turnaround plan. It is important to note that we are still in the early stages of reinvigorating our nutrition business and it will take more time to grow the nutrition business sustainably. At the end of Q1 2024, our nutrition subscriptions were 150,000 compared to 160,000 in the prior quarter. Connected Fitness revenue was $3 million in line with the prior quarter and 50% below the prior year first quarter. We will continue to strategically use promotions to sell our existing inventory. We are very pleased to announce that gross margin improved dramatically in Q1 of 2024. The company achieved a gross margin of 67.7% for the first quarter, which increased 550 basis points from 62.2% in Q4 of 2023 and increased 470 basis points from 63% in Q1 of 2023.

This was the highest gross margin reported by the company since we went public in Q2 of 2021 when we had a gross margin of 69.2%. Digital gross margin was an impressive 79.1% for the quarter, which represented a 600 basis points improvement over the 73.1% in Q4 of 2023 and 220 basis points higher than the 76.9% in Q1 of 2023. As we discussed in the last earnings call, our 2024 digital gross margin will benefit from lower content amortization as our production and content spend has become more efficient. Our goal is to drive digital gross margin to over 80%. The company also recorded major improvements in nutrition gross margin during the quarter. Nutrition gross margin was 59.9%, representing a 670 basis points increase from the 53.2% in Q4 of 2023 and a 180 basis points improvement from 58.1% in Q1 of 2023.

The year-over-year improvement was driven by carefully managing inventory and pricing. Connected Fitness gross margin was minus 19.5% for the quarter versus minus 13% in the prior quarter and minus 25.7% in the prior year first quarter. Our Connected Fitness business is less than 5% of our total revenues. And as shared on previous earnings call, we are focused on selling on hand inventory to generate incremental cash. While we’re not actively looking to expand the Connected Fitness hardware business we are still very focused on ensuring that we will continue to deliver the finest Connected Fitness content. Moving on to operating expenses. Excluding the asset impairment and restructuring charges, operating expenses for the quarter were $90 million versus $91 million in the previous quarter and $113 million in the same quarter last year.

This represents a $23 million reduction in operating expenses versus the same quarter last year. Selling and marketing expense was reduced to 49% of revenue compared to 50% in the prior quarter and 53% in the prior year’s first quarter. We remain on track to achieve our 1,000 basis points improvement in EBITDA from selling and marketing expense reduction and our lower preferred customer discounts. This benefit would equate to $50 million based on revenues of $500 million. Technology and development was 15% of revenue in the current quarter and prior quarter compared to 13% in the prior year first quarter. G&A was 11% of revenue in line with the prior quarter and was 12% in the prior year’s first quarter. The company recorded a significant reduction in our net loss for the first quarter.

Net loss was $14 million in Q1 of 2024 compared to a net loss of $65 million in the prior quarter and a net loss of $29 in the prior year’s first quarter. This represents a major improvement of 52% from the prior year first quarter. Adjusted EBITDA, which has now been positive for two consecutive quarters, was $5 million in Q1 of 2024 versus $3 million in Q4 of 2023 and a meaningful improvement compared to the minus $1 million in Q1 of 2023. We believe that this is a clear indicator of the effectiveness of the company’s turnaround plan and the overall reduction in the breakeven threshold that we have engineered. Next, moving on to the balance sheet and cash flows. Our cash balance was $39 million compared to $33 million in the prior quarter.

This improvement was driven by cash generated from organic operations. Our net cash position, which is our cash less debt as described in our earnings release, increased from $4 million at December 31 to $14 million at March 31. This $10 million liquidity improvement in a 90 day period was driven by our focus on cash generation. Our operating cash flow in the first quarter was $9 million versus cash used in operations of $9 million in the prior quarter and $8 million cash used in Q1 of 2023. Year-over-year, this is a $17 million improvement driven by a turnaround plan, which created the ability to run the business in a cash generating position at this level of revenue. Inventory was $21 million at the end of the quarter, down from $25 million at the end of the prior quarter.

This represents 10 quarters of inventory balance improvement and is the lowest inventory level since going public in 2021. As we continue to sell the connected bike inventory, we will settle in this range of inventory value, which is primarily comprised of nutrition supplements. Our content and tech CapEx was in line with the prior quarter at $4 million and 28% below the prior year first quarter. The lower CapEx profile is already showing in both our improved gross margins and our improved cash flows. We measure free cash flows as our cash generated from operations less PP&E CapEx, which equates to $7 million in the first quarter. This is a tremendous improvement versus minus $10 million in the prior quarter and minus $11 million in Q1 of 2023.

This is the first positive free cash flow quarter since going public in 2021. Our debt balance was $25 million at March 31st. We have paid down half the debt since the original borrowing in 2022. Lastly, turning to our outlook for the second quarter. We expect the second quarter revenues to be in the range of $103 million to $113 million, we expect a net loss in the range of $20 million to $14 million and an adjusted EBITDA in the range of minus $3 million to positive $3 million. Our guidance assumes seasonality, which typically results in lower level of revenues in Q2 versus Q1, ongoing turnaround initiatives being implemented and higher expenses associated with our annual Summit event. With that said, we announced several major milestones today and look forward to providing further updates over the coming quarters.

I will now ask the operator to open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from George Kelly with Roth MKM.

George Kelly: So maybe I’ll start on the nutrition business. I’m curious, you showed nice sequential growth there. And I’m just curious, what drove that, was that Amazon or is there something else that was meaningful in that sequential improvement?

Mark Goldston: I would say it’s a mix of things. One, it is definitely early green shoots of our turnaround happening in nutrition. Some things to note there is in addition to better volume of orders, there was also the discount that went from 25% to 20%, which effectively increases revenue. And then also there’s some earned events because that line is called nutrition and other. But overall, George, I would say it’s the early green shoots of that business starting to turn around, which is good news.

George Kelly: And then second topic I wanted to cover is on some of the new growth initiatives that you spent time discussing. Specifically, I was hoping you could share a little bit more about what you’ve seen in the month since you launched the entitlement campaign. And then secondly, if you could cover — Carl, I know you mentioned that the reactivation campaign is taking a bit longer than you hoped. I’m just curious why that hasn’t been more successful?

Carl Daikeler: So the entitlement campaign is happening in stages. So it launched literally last week of March. So it’s just ramping up. So it’s a balance between marketing subscriptions and marketing specific programs that solve a specific problem. So as we’ve always done in our 25 years, we’re building up the marketing at a ratio of customer acquisition to lifetime value. As that marketing matures and we increase lifetime value that marketing will scale. So we’re really in the early days of that scale as we continue to add new programs available for single program purchase. Each of those will now scale and that’ll start to compound. But it’s very early at this — in this chapter of selling specific programs. But I will say, this is literally what the company has been doing for 25 years when we really came out of the gate selling specific programs on VHS tape and then DVDs. Now we’re just doing it digitally.

So very excited about what that means in the coming months, but it’s early days on it. In terms of the pace of reactivation, you need to be very careful with CAN-SPAM laws and regulations to make sure that we’re not spamming people. So we’ve got to be just careful with how many emails we send to what cohorts in the prospect list. So what is a very large bucket of emails, we just want to be appropriate so that we’re both respecting the recipients of those emails and also being as efficient as possible with those emails so that we’re not scorching the database. So we’re building a relationship with them and gradually over time we expect it to be more and more productive, obviously, without the cost of acquisition because we already own the name.

Does that help?

George Kelly: It does, yes. Understood. And then last question from me is on the selling and marketing line. I’m curious the sequential decline in selling and the absolute amount of selling and marketing dollars spent was pretty modest, less than $1 million compared to 4Q. And so I’m curious if the commission changes, A, are they kind of fully in that 1Q number and B, are you choosing to reinvest some of that savings in other advertising campaigns? And should we expect that going forward that you’ll kind of divert some of those savings into other marketing related initiatives?

Marc Suidan: So what I’ll say is there’s cash spend and then there’s accounting spend, right? So what happens is at the end of Q4 of last year, we accrued expenses at the old structure but we benefited from a cash spend profile in Q1 while we were — while that deferred cost from the balance sheet was working its own to the balance sheet. So that’s number one why you didn’t see as much of a benefit there as anticipated. Number two, Q4 is always a quarter where we spend at least on media just because for seasonality purposes while Q1 we spend more. So that’s another factor why it goes up in Q1 over Q2. And then number three, like I said earlier, part of those — part of that 1,000 basis points is going to come in the form of enhanced revenue about 200 — and I’d say about 200 basis points to 250 basis points, because the discounts are lower, right?

So our changes were in many places. So that’s where the benefits are coming from. So from a cash standpoint, we’re seeing the benefit and you see it in the EBITDA line and you’re going to see it kind of profess itself more quarter-over-quarter. I would say on the reinvestment question, that’s a good one, George. I would say whatever we reinvest is going to be within our desired P&L structure and our LTV to cap discipline.

Mark Goldston: George, just to add on to that, given that we are still in turnaround mode and we are absolutely driving, obviously, had two consecutive quarters of adjusted EBITDA and positive free cash flow, we’re really not in reinvestment mode. We will be but that’s not really where we are right now. Right now, it’s we’re trying to run a very profitable company with a radically revised cost structure and we’re vigilant about our ROIC numbers that we use in our marketing. So we have allowables or thresholds that we will stand up to beyond which we don’t get the ROI yield that we’re looking for, so we curtail spending beyond that. So when we’ve fully turned the company around, we will be in a position where we can do more investment spending and elongate the horizon for the return on the invested capital. But right now in the middle of a turnaround, that’s not what you’d want to do.

Operator: Our next question today comes from Jonathan Komp with Baird.

Jonathan Komp: Just one question about the progression quarterly that you see. Are you expecting to stay above $100 million of revenue in the third quarter and fourth quarter? And if so, could you share by how much?

Mark Goldston: We’re not giving guidance beyond Q2. As you know, we detailed a whole bunch of initiatives and we’re in the middle of the turnaround. As these initiatives start bearing more fruit, you’ll see that percolate into the revenue line and you’ll see the revenue line go in a different direction.

Jonathan Komp: And just a follow-up, given typical seasonality, I’m just trying to understand how much flexibility and time you may have for those initiatives to take hold. So could you maybe just share more detail on the nature of the covenants that you have? And if those initiatives did take longer to take hold, what options you would have with the balance sheet?