At the outset I would like to thank those who commented on my last Gaia Inc. (NASDAQ:GAIA) article for their insights (please read the article if you want more background). In particular User 19027051, who pointed out the January 2019 price increases, and Wall Street for Main Street for questioning the viability of aggressively driving subscriber growth whilst simultaneously reducing customer acquisition costs as a % of streaming revenues in 2019. One investor is never going to have all the answers and feedback is essential as it encourages, to put it in Gaia like terminology, mutual truth-seeking.
This article focuses on how Gaia’s January 2019 price increases and a new premium subscription adds credibility to management’s key growth and profitability targets: (1) growing subscribers to the 1 million mark by the end of 2019; (2) becoming profitable by early 2020; and (3) customer acquisition costs falling meaningfully as a % of streaming revenues post 1Q19E.
How the price increases drive blended ARPU higher
Source: Company website
Early January 2019, Gaia raised its prices for the 3 month plan and monthly plan as shown in the graphic above. The old plan used to cost USD20 for 3 months and USD9.95 per month thereafter for the 3 month plan and 99 cents for 2 weeks and USD9.95 per month thereafter for the monthly plan. It seems a bit strange to raise prices when Gaia is trying to ramp up subscribers. This indicates to me that management is confident about subscriber growth, the Q418 subscriber number met or exceeded their expectations and now they are pushing not only subscriber growth but for subscribers who Gaia calls more mature members. Those whose subscriber lifetime is greater than 2 years. To bolster ARPU further, on their 3Q18 earnings call, CEO Jirka Rysavy said that they created a new premium offering for USD299 per year.
Sources: Company information and author’s estimates
The spreadsheet above looks at the potential impact of these price increases on blended ARPU. Looking at 3Q18, Gaia’s actual blended ARPU works out at USD7.44 per month. Moving to 4Q18E, I have assumed the monthly ARPU for the old plan was USD6.67 (USD20 / 3 months) and the new plan monthly ARPU is USD9.67 (USD29 / 3 months). The logic is that after three months subscribers have had enough time to decide whether to stop subscribing or to migrate onto the much cheaper annual plan. I have also assumed the 99 cents for two weeks plan on average has a similar monthly ARPU to the three month plan. In reality it probably attracts the least committed new subscriber, creates the highest churn levels and may be discontinued by Gaia at some point. My belief is that the USD11.99 per month cost after the first payment will rarely be realised. It is simply a marketing tactic to encourage new subscribers to choose the annual plan and thereby increase the lifetime value of each new subscriber. I have also conservatively assumed that the new premium subscription at USD24.92 per month (USD299 / 12 months) does not impact the financials until 2Q19E.
The annual plan’s ARPU is USD8.25 per month (USD99 / 12 months) and it remains so for the forecast period. If subscriber growth is largely unaffected by the monthly price increases then Gaia’s management will probably consider increasing the annual plan price but I have not included this possibility in the model. In 4Q18E, I have assumed a subscriber mix of 40% monthly plans and 60% annual plan. This results in a blended monthly ARPU of USD7.62 very close to Gaia’s average blended monthly ARPU over the last eight quarters of about USD7.65. In the model the subscriber mix gradually changes to 25% monthly plans, 65% annual plan and 10% premium subscription by 1Q20E. This reflects management’s aim to increase lifetime value per customer.
Illustrative Lifetime Value (LTV) and Customer Acquisition Costs ("CAC")
The spreadsheet below is illustrative in nature as estimating Gaia’s lifetime value per subscriber can be more art than science. On Gaia’s 1Q18 earnings conference call, CEO Rysavy said (emphasis is mine): “We have again maintained our investment discipline. We were able to meaningfully decrease our dollar spending per customer acquisition to mid-80s from mid-90s a year ago. Being ahead of the pace for our 2019 target, we now plan to focus on bringing more of higher lifetime value member, rather than keeping decreasing our costs per acquisition.” On the 2Q18 earnings call, CFO Tarell added that CAC per subscriber had dropped to the low 80’s for 2Q18 due to organics like member referral and emailing former subscribers. For my calculations, I used CAC of USD85 per sub in 3Q18 to incorporate the additional costs of launching the Alternative Healing channel and premium subscription offering in addition to translation of content into French, German and Spanish.
Sources: Company information and author’s estimates
Dividing total customer acquisition costs (USD million) in the income statement by CAC per sub (USD / sub) gives an idea of gross subscribers which then enables an estimation of churn. In the column headed 3Q18, the trailing 8 quarter churn averages out at 12.85%. This implies an average customer lifetime of 1.95 years. CEO Rysavy describes mature members as having a two year plus lifetime so this number seems reasonable and a key KPI that Gaia is looking to increase. Multiplying customer lifetime (1.95 years) by blended monthly ARPU (USD7.44) and gross margin (assume constant level of 85%) gives a lifetime value per subscriber of USD147.5. This equates to a LTV/CAC ratio of 1.74x which is on the low side as management guided on the 1Q18 earnings call: “while maintaining our discipline of not spending more than 50% of lifetime value per subscriber.” However looking at the 8 quarter rolling average, a similar period to the 1.95 years average customer lifetime, the ratio works out at closer to 1.95x or a CAC/LTV of 51%.
Looking out to 1Q20E, I assumed that Gaia manages to reduce average quarterly churn to 10%. This can be achieved by growing the non-yoga channels and Gaia is doing this by launching Alternative Healing in addition to the Seeking Truth and Transformation channels. My reading of management guidance is they eventually expect an equal weighting for each channel. So having four channels should reduce yoga to 25% of total subscribers. On the 1Q18 earnings call CFO Tarell mentioned that the lifetime value of the other channels is roughly double yoga subscribers. With a 10% quarterly churn rate the lifetime of an average subscriber grows to 2.5 years. Lifetime value grows rapidly to USD262 per subscriber due to a combination of increasing lifetime and blended ARPU.
Regarding forecast CAC, I deduce that Gaia is finding it is costing less than they budgeted to track the 1 million subscriber target by end of 2019 growth trajectory. This is due in large part to what Gaia refers to as organics which is referrals and customer retention. In addition, they are finding certain marketing channels like Youtube much more cost effective. But rather than cutting CAC per subscriber more, they are maintaining the USD80 to USD85 per subscriber range and ploughing the additional dollars into increasing the lifetime value of each customer. So I have assumed that CAC gravitates down slightly to USD82.5 per subscriber by 1Q20E at which point LTV/CAC grows to 3.17x or 2.29x on an 8 quarter rolling average basis. Here we have the answer to how Gaia will meet its 1 million subscriber target by the end of 2019 while at the same time predicting CAC as % of streaming revenues will fall and Gaia will turn profitable early 2020. The impact is modelled in the spreadsheet below.
Impact on Gaia’s income statement
Sources: Company information and author’s estimates
The spreadsheet above shows how all the assumptions impact Gaia’s forecast income statement. Total subscriber numbers come from the model in my previous article. The growth assumptions are more conservative than Gaia’s so my model misses the 1 million subscriber target by a quarter (1Q20E instead of 4Q19E). 1Q20E streaming revenues of USD30.6 million are nearly three times 3Q18 streaming revenues of USD10.9 million. This is due primarily to a doubling of the subscriber base from 515,000 in 3Q18 to 1,055,696 in 1Q20E and blended ARPU growing from USD7.44 to USD10.27 per subscriber by 1Q20E. Gross margins are conservatively assumed to remain at the 85% level which is lower than the 87.1% achieved in 3Q18. Though customer acquisition costs are forecast to increase to USD17.8 million by 1Q20E the growth in revenue far outpaces this resulting in CAC meaningfully decreasing to under 60% of streaming revenues. Assuming negligible interest and income tax over this period, net profit moves into positive territory by 1Q20E. This is inline with Gaia’s management guidance.
One of the main risks of raising prices is that it could reduce subscriber growth. But by targeting the higher churn monthly plan customer segment, Gaia is enticing new subscribers to commit to the annual plan. It may take a few quarters to gauge if this is working. Reading through Gaia’s earning transcriptions gives the impression that management is exploring uncharted territory. They may, for example, ultimately find that the cost of increasing customer lifetime value is much more expensive than they estimated. So far they have navigated with skill but they may be forced to change tactics at some point which could cause Gaia to miss subscriber and profitability targets. Though a target miss may be mainly cosmetic, because management has emphasized these targets repeatedly there inevitably will be some investor fallout. Of greater concern is that Gaia is burning through cash to fund their growth and a sizeable misstep may result in a cash crunch. Though Gaia could raise another round of equity finance it would be more expensive if raised on the back of failure rather than success.
I think management’s guidance regarding: (1) growing subscribers to the 1 million mark by the end of 2019; (2) becoming profitable by early 2020; and (3) customer acquisition costs falling meaningfully as a % of streaming revenues post 1Q19E is achievable as Gaia ramps up ARPU and seeks to extend the average lifetime value per subscriber. It seems to me that Gaia has discovered that the innate demand for its non-yoga content is higher than expected and the organic effects help keep customer costs down. Its live event center should open in 2Q19 and it is yet to really drive international sales. Gaia could also increase the price of its annual plan at some point. Assuming price increases mainly discourages the high churn low lifetime value subscriber, ramping up ARPU certainly strengthens the bull case.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
This article was written by
Disclosure: I am/we are long GAIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.