Gaia Inc. (GAIA) CEO Jirka Rysavy on Q2 2018 Results - Earnings Call Transcript

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About: Gaia Inc. (GAIA)
by: SA Transcripts

Gaia Inc. (NASDAQ:GAIA) Q2 2018 Earnings Conference Call August 6, 2018 4:30 PM ET

Executives

Jirka Rysavy - Chairman and Chief Executive Officer

Paul Tarell - Chief Financial Officer

Analysts

Mark Argento - Lake Street Markets

Steven Frankel - Dougherty

Eric Wold - B Riley

Operator

Good afternoon, everyone and thank you for participating in today's conference call to discuss Gaia Inc.'s Financial Results for the Second Quarter Ended June 30, 2018. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell. Following some prepared remarks, we'll open the call for your questions.

Before we get started, however, I'd like to take a minute to read the Safe Harbor language. The following constitutes the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The matters discussed today include forward-looking statements that involve numerous assumptions, risks and uncertainties. These include, but are not limited to, general business conditions, historical losses, competition, changing consumer preferences, subscriber costs and retention rates, acquisitions, and other risks and uncertainties detailed from time-to-time in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements.

With that, I would now like to turn the call over to Gaia's CEO, Jirka Rysavy. Please go ahead, sir.

Jirka Rysavy

Thank you, Justin and good afternoon everyone. So our second quarter results ended again ahead of our expectations. Subscribers grew 68% to 466,000 from 277,800 a year ago. This puts us ahead of the growth rate needed for us to reach our next target of one million subscribers by end of the next year.

While we invested during the quarter about $1 million less than we budgeted in our member marketing plan. This was partly helped by increasing number of members joining us by organic means. Remember, acquisition coming from organic channel was up again during the quarter and is now solidly over 40%.

Streaming revenue increased 65% compared to same quarter last year. The revenue and subscriber growth rates from now should be comparable going forward. Gross margin grew 70 basis points to 86.8%, and we expect to maintain this level of gross margin for the rest of the year.

By focusing on a content merchandizing over the last few months, we diversified the viewing of our titles or no title now represents more than 0.6% of total viewing. About 8,000 titles are viewed every single month, there's no group of titles such as series of collection representing the primary viewing for more the 2% to 3% of our members.

We also expanded our geographic reach to over now 180 countries. We received a permit which somebody asked last time in our call and we started our preparations streaming for our streaming event center, which we plan to launch - I wish to plan to launch our premium level subscription at about $300 annually, probably sometimes next year. We will provide you an update about this premium subscription during our next call. And we expect to hit our 0.5 million milestones which is 500,000 member somewhere in mid-September.

And Paul will speak to you now about the quarter. Paul?

Paul Tarell

Thanks, Jirka. Streaming revenues in the second quarter increased 65% to 10 million compared to the year ago quarter due to continued strong subscriber growth. Gross profit in the second quarter increased 61% to 9.1 million compared to 5.6 million in the year ago quarter. Gross margin increased 70 basis points to 86.8% from 86.1% in the second quarter of last year.

The increase in gross margin has continued to be driven by increased revenues and continued efficiency in our per subscriber costs of streaming and content, as Jirka mentioned, we expect to maintain our gross margins at this level through 2018.

Total operating expenses in the second quarter were $15.6 million compared to $12 million in the year ago quarter. Most of the increase was driven by increased spending on customer acquisition costs to support higher growth rates.

Our customer acquisition costs as a percentage of streaming revenue was 85% during the second quarter of 2018, despite the increase in the volume of subscribers added. This is down from 99% in the year ago quarter and below the 95% to 105% of streaming revenue target we established on our May conference call.

This was due primarily to continued efficiencies in our marketing efforts and continued increases in organic contribution. As a reminder, we include all marketing expenses in these numbers, including the cost of translating our existing library and launching our foreign language offerings.

While we perform favorably against the spend target in the second quarter, I would like to reaffirm that we will be targeting and investing 95% to 105% of streaming revenues and subscriber acquisition efforts for the remainder of 2018, while maintaining our discipline of not spending more than 50% of lifetime value.

With this investment rate, as Jirka mentioned, we are projected to reach our next major subscriber milestone of 0.5 million subscribers in mid September 2018, on our way to 1 million by the end of 2019.

The overall net loss in the second quarter was 6.3 million or $0.35 per share compared to a net loss of 6.3 million or $0.42 per share in the year ago quarter. As of June 30, 2018, we had 41.2 million in cash, our real estate valued at roughly $30 million and an undrawn line of credit for $13 million.

With that, I would like to now open the call up to questions. Justin?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Mark Argento with Lake Street Markets.

Mark Argento

Hey, good afternoon, guys and congrats on a strong quarter. Just had a couple of questions around the organic growth sub acquisition here, which is obviously very solid in the quarter. Could you talk a little bit about where you're seeing those subs, where they're coming, the word of mouth and kind of how you track them and then in particular the overall - if you could drill down a little bit on what you spend for customer acquisition in the quarter would be helpful?

Jirka Rysavy

Paul, I think I will take the first one, so on organic yeah, that was very positive news for us, we talked about last time because we first time get to about 40% from mid 30's. Now all the months in a quarter where ahead to 40 between like 42 and 40 above that. And so it was very nice for us because obviously that's what helped we spending less because we budgeted to have to buy a little more than we actually did and we hope that trend will continue, but obviously it depends how - there's always a lot of factors. But it was a very nice quarter, we kind of tried to do several thing in a marketing like for example, we focus like more in bundles especially in June, like spending more money in a certain - the marketing efforts and - but I think the organics, there are two main source what's kind of helping, one is kind of what we started to call member referral and you're going to probably hear from us a lot about it next year as we're really putting a lot of effort to what we call member referral. We have something we extended to like seven days to play - pay for - we basically call member watch free or friends watch free, so you're member you can gift somebody a video and they have like seven days to watch it. So that was one of the factors. We also - it's always a quarter where we focus more an e-mail because it's a slow quarter. And so those would probably the biggest factors, but I think as we go to next year this member referral, you'll hear more about from us. Paul for the second?

Paul Tarell

Yeah sure, in terms of that the CPA per sub all those factors contributed to reducing that rate down from the mid-80's to the low 80's for Q2.

Mark Argento

And any general trend - anecdotes in terms of churn, the stickiness of the cost more lifetime value [ph]?

Jirka Rysavy

I don't think there's really meaningful churns in second quarter, I think we pretty much stay with it. There's no - I don't think it was either direction, but it's like in a second quarter, if you kind of start fundamentally improving your trends typically to fourth or first quarter when you see the big move, the second and third which will be similar for Netflix. You see the kind of maintaining to trade, it's good. You don't expect big improvements on that because just more people outside and stuff like that, so we have - despite what I talked about merchandising that when we kind of started this business and kind of look at the Netflix statistic and they said there is no title more than 1% and no group more than 3%. We said, we should get there one day and we were already there, so our highest title it's like 0.6 and most - I mean, if you go to title number 5, it's more like 0.2 and there's no group more than 3% either. So it kind of looks like that general streaming mechanism works with Netflix works with Gaia now too.

Mark Argento

Great, thanks, guys. Congrats again.

Jirka Rysavy

Thank you, Mark.

Operator

And next will be Steven Frankel with Dougherty.

Steven Frankel

Good afternoon. I noticed at the end of the June, you held a live streaming event on the yoga side and maybe could you tell us what you learned from that and what other kind of innovative offerings might you have in the next quarter or two?

Paul Tarell

Hi, Steve, it's Paul. I will take that one. So we're always testing and iterating on ideas to increase engagement and the yoga population is one where we're always looking at ways to engage them as you can imagine coming off of strong Q1 yoga performance, what we're looking at is trying to engage and motivate those people that joined us in January. So that's really what that test was designed to do, to create a more personal connection to our host. So it was a pretty small test in terms of the number of people that we reached out to, we primarily just wanted to test the mechanisms of being able to do it and I think it was an overwhelming success from that perspective and will be leveraging that test for other tests going into the back half of the year on other populations. But we don't really have a calendar that we are publishing around that. It's more about a team by team basis of identifying things that they want to test and then having the mechanisms to be able to do it to see what the impacts are.

Steven Frankel

Okay and congratulations on the strong organic traffic and the increase in international penetration. Could you update us on your thought process around ramping up foreign language content and maybe actively marketing to select international markets?

Jirka Rysavy

Right now international it's mostly organic. And as we kind of said a couple of times, we don't really have a big plan to focus in international until we hit a million subscribers as a kind of issue, as a part of the million. We're obviously doing it and so we - if you kind to watch our international, we kind of switch and start to take a lot of different currency. Paul can maybe talk about what we take now.

Paul Tarell

Yeah, we're up to six currencies today with another six coming by the end of the year.3

Jirka Rysavy

So those are kind of prepping the marketing for international. I think we would start somewhat next year, but it's still not going to be a big reliance on international. I think you're going to start to hear more about what we call the member referral. We all go - probably also next year you're going to have some or what we call the premium subscription, which I said, it was $300 we didn't decide the timing on it yet, but we did some test with our members and it's very good feedback. But we will provide a little more next year which, will be more impacting the average ARPU than would be a number of subscribers. But we would go - internationally we're starting right now on marketing based on the country list what we call lower conversion - higher conversion rate, which are - would be like New Zealand, Australia for example, Germany start to be very promising, Scandinavia. So we do a lot of testing and establishing which countries are the best to market when we're going to hit it. But it's international will be more for 2020, but we'll start to probably talk to you about some in our next calls, what's the percentage because we actually did see slight international uptick as a percentage of our overall members. But it's kind of promising, but it's not yet significant to really talk about it as a plan.

Steven Frankel

Okay and then Paul, could you update us on what cash flow and free cash flow was in the quarter?

Paul Tarell

The Q is going to be published this afternoon which will have all those details in there.

Steven Frankel

Okay and that's all of my questions for now. Thank you.

Operator

And next will be Eric Wold with B Riley.

Eric Wold

Thank you. And good afternoon, guys. A few questions, one is a follow-up on the comments around the margin - the organic growth and kind of the referral program you've got where your members can share videos with someone else kind of entice them to come over. How can that most into more official referral program within - someone compensate members who're going to drive in people over and kind of have an incentive for them to do that kind of, do you see there's an opportunity really accelerate that member referral program as you - if you're going to move towards them like that?

Jirka Rysavy

Yeah, there is really two questions in it, but answer is probably yes on both in different manner. So the first, the member referral it's - I don't expect that it will be a monetary composition even we will offer it. We have what's called an ambassador program, which is for people who are –for multiple members. So people can join the ambassador program and refer for and then we pay them. That's kind of actually part of division what we call sales and I was actually going to report to Paul right now and we're going to quite focus on that one. The member referral, it's for people who would refer one to 10 members. And there would be some benefits, but I don't think there would be really monetary as we're looking for thousands of people. And yeah, there would be like some monetary benefits not necessarily money, we still didn't - we tried right now few of them. So we kind of test would we have the best way as we launch, but that's probably from anything what we're talking, we will now really get there very solid as we kind of get closer to our million members because that is, one, the significance there because we're going to have more and more mature members and their member referrals is the best way how to harness that power. And as we also launched some aspects of what we call community for this member interaction, but I would say going over next two, three years that would be the key part the member referral and what we call community aspects of the marketing because it's - originally we thought it would be more [indiscernible], but now we see that the marketing and getting new members are actually very good aspect of that undertaking.

Eric Wold

And then maybe for Paul, I know this is not exact figure, it's just a kind of a simple average in the quarter. But I look at kind of the simple average to get to kind of monthly revenue for sub debts in the quarter or year-over-year and quarter-to-quarter. Were you back weighted in the quarter in terms of subscriber additions maybe more in the $0.99 program [ph] meeting that was kind of the cadence of the marketing more in June than any other months?

Paul Tarell

Yeah, I mean you hit it spot on right there. So it's really - last year we were focusing on bringing in members earlier in the quarter to offset that and this year one of the tasks that we were looking at doing was, what's available in June so that we could use that for our July through August planning exercise, so that's exactly what happened this quarter. It was more back weighted than normal.

Eric Wold

Okay.

Jirka Rysavy

And also we tried to - because we kind of saw that if you kind of do it early in the quarter and you guys, analyst when you kind of analyze it then you get ahead of the revenue compared to members and we saw - when we saw people publishing that hey, this is maybe not the best way to do it. Because then the revenue - while we hit the members the revenue can stay behind because the $0.99 is a big number as a percentage of quarterly revenue, if you take it one month $0.99. So we try to right now do it such a way that the revenue and - revenue growth and member growths will be likely same percentage. So you have a good guidance how to budget the revenue, compare guidance because it did not work if you skewed it up front. So we tried to make it more predictable because we don't want to kind of get our targets and stand behind the analyst revenues.

Eric Wold

Okay.

Jirka Rysavy

And people mostly are focused and the members right now are still a lot going forward. I think revenue on earnings will be key part, so I would just - we want to establish the way how we're doing it, so it's predictable. I think the predictability it's probably the key things what is driving here.

Eric Wold

Okay and final question for me. So obviously you're budgeting 95% to 105% spend and you went into 85 and you made a decision to kind of harvest that cash and not spend it and kind of stay below that. As you're looking at the back half of the year, if you end up being below that 95 to 105 again, what's the decision process behind - behind you staying below that and going to harvesting it or would you kind of accelerate spend to get into that range to bring in those subscribers early? What's the decision between the two?

Jirka Rysavy

I think for us, it's really a question how much organics, how is the organics is going to act because that's probably the delta what are you looking for. I think we want to really be stable, we don't really expect to accelerate everything we have right now. If you look at what we need between now and then, it's about 85% growth, so it would be - sorry 65% growth, our growth rate for subscribers. And so for that the revenue - we want to stay relatively predictable, with understanding second and third quarter are typically slower and if you look Netflix, they do it and they have the same issue and last time when you provide too high guidance, you miss it for little bit, which is sometimes a function - would happen at Netflix, we want to avoid that. So we don't want to be pretty stable, but understanding that second and third always will be a little slower and fourth and first will be a little maybe higher. But the generally we try to be pretty predictable and as we kind of said, that we would hit million, right middle of this September, we can actually give you the date. But - and then so hitting the million subscribers [indiscernible] don't look over certain - over performance on subscribers if anything we save some money.

Eric Wold

That makes sense. Thank you, guys.

Operator

And next will be Darren Aftahi with Roth Capital Partners.

Unidentified Analyst

Hi, this is Donna for Darren. Thanks for taking my question. I was wondering if you could talk a little bit about some of the dynamics of the subscribers you added during the quarter, if you saw any trends in those new subs attracted to a certain content or one of the three main channels.

Jirka Rysavy

We have - it's obviously seasonal - in our first quarter a lot of subscribers would come from Yoga. Second quarter a lot of - most of the subscribers - I mean, I'm talking as a percentage, so first quarter the Yoga will dominate, second quarter what we call seekers and seeking truth will dominate. So there is definitely shift from Yoga to seekers in second quarter as probably by far fastest growing quarter and second quarter was the seekers.

Unidentified Analyst

Got it and then related to any potential price increases, do you have any sort of outlook as to what would need to happen first? Does it depend more on how quickly you can grow above one million subscribers or gaining a greater percentage of international plantation [ph] just curious about your thoughts there?

Jirka Rysavy

Well, internationally right now we would charge like EUR10 like in Germany, so you can say that somewhat price increase about - there's about 15% difference. And all international market they - at par are mostly they are in the US, so it's obviously part of the testing. We probably do some other testing, but don't expect any meaningful price increases before we hit million members. However, we will talk about it mid of next year, but we don't expect to change the basic price. We might have some offerings, which will be higher like - I talked about the premium subscription, which will be three times the current price and that probably will be launched somewhere during next year. But it doesn't mean we will change the price to our bases still we hit a million members.

Unidentified Analyst

Got it and then last one from me around premium. I think you mentioned you've tested it with some of your subscribers a little bit. Is that how you plan to roll it out as well in sort of segments or is it just going to once it's live it's going to be live to all of them?

Jirka Rysavy

We didn't test it. We kind of did like questions - how we -

Paul Tarell

Survey.

Jirka Rysavy

Survey, so we - once we - when it's live will be available for everybody and we would expect there will be more upgrades of existing members than new members coming to it. However because it brings - for the event space we bring some new name, so they would probably also have a little acquisition left, but we don't - we don't planning on that. So I think it's more ARPU, it's basically you look at that if you have - in that you would have - on the top of the regular service you would also have streaming of those weekend events what you can see live with multi-lingual simultaneous translation [indiscernible]. We tested a couple times last year and it was kind of surprisingly good. We received some of the revenue from events. The streaming was like $500,000. So it's - it would be a lot of testing, but I'll believe it's the future and we're really investing into preparing the streaming, especially the international translations because last time 80% of the streaming came from international and those 80% of the streaming revenue came from international markets. So we will talk more about next quarter about this, but since last quarter somebody will expect to see apply for permit and locally to get to build diverse base in our campus, so we're providing the update on it today. But really I think by the third quarter we would have enough data to talk, give you some specifics, so you can put it in the plans. I would suggest not to do much still we kind of give you specifics. So we don't give the -

Paul Tarell

Yeah, we're skeptical.

Unidentified Analyst

Very good, thank you and congrats on the quarter.

Jirka Rysavy

Thank you very much.

Operator

And at this time this concludes our question-and-answer session. I'll now turn the call back over to Mr. Rysavy for closing remarks.

Jirka Rysavy

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

Operator

Well, thank you. And ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.