Gaia Edges Closer To Achieving Positive EBITDA By The End Of September 2019

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About: Gaia, Inc. (GAIA)
by: Eight Diamonds Advisors
Summary

Gaia is a video streaming service that provides curated conscious media.

Gaia released good Q2 2019 results though subscriber churn looks high.

Near-term goal of achieving positive EBITDA by end of September 2019 looks within reach.

12-month goals depend on rising ARPU, falling churn, and tight cost control.

I remain long on the stock.

Q2 2019 highlights

Gaia (GAIA) reported its Q2 2019 results on August 5, 2019. Subscribers grew to 582,200, revenues were $13.2 million, up 32% from the year-ago quarter, the EBITDA loss fell to 12% of revenues, and net loss was $4.5 million. Gross margins fell to 86.4% due to increased content amortization. Gaia continued to reduce customer acquisition costs (CAC) in its drive towards EBITDA profitability. Q2 2019 CAC was 57% of revenues versus 153% for Q2 2018. Though Gaia had a cash balance of $17.5 million at June 30, 2019, its debt increased from $12.5 million at December 31, 2018, to $18.4 million at June 30, 2019, due to continued cash outflows and a small acquisition.

During the quarter, it refinanced its line of credit with a $17 million mortgage at a current interest rate of 6.53% secured by its corporate campus. Gaia also issued $1.8 million in secured convertible promissory notes as part of its acquisition of 40,000 Alternative Healing and Healthy Eating subscribers from FMTV. Other highlights include the campus 'Gaia Sphere' soft launch (limited tickets to 125 people) in June 2019 and for the second event on August 2019, Gaia has started actively marketing the $299 Live Access subscription. The first full capacity event will be in October 2019 and this is already sold out with the only option remaining for those who would like to watch this event being the Live Access annual subscription.

Quarterly income statement projections

Source: Company filings and author estimates

The projections in the spreadsheet above set out my interpretation of management's broad forecast guidelines. It serves as a sense check, and I would appreciate reader's thoughts as well. Key assumptions provided by management include:

  • Achieve EBITDA profitability by the end of September 2019 with a subscriber level of 590,000 to 600,000

  • Revenue growth in the mid-20% range in Q3 and Q4 2019 and low-30% in 2020. I assume this growth is the quarter versus the year-ago quarter

  • Achieve positive income and free cash flow in July 2020/early H2 2020

Highlighting some key assumptions in the quarterly income projection spreadsheet above, I have forecast subscriber growth to remain low with an average quarterly net subscriber increase of just 20,000. Implied Q2 2019 churn was high at around 117,000 subscribers and this really needs to be sub-80,000 per quarter to keep customer acquisition costs low. The price increase to $11.99 in January 2019 is starting to drive the average revenue per sub which has risen from an average of $7.50 for the prior three quarters to $7.67 in Q2 2019. The next ramp up in average revenue per subscriber is expected in January 2020 when existing monthly subscribers will also move to the $11.99 plan. Further uplift should also come from the $299 Live Access annual membership, though it is too early to really predict the take-up rate. I have projected average revenue per subscriber of $8.8 in Q1 2020E and $9.0 in Q2 2020E which I think is conservative.

On the cost side, total subscriber costs were $7.5 million or 57% of revenue in Q2 2019. This could have been a few million dollars higher if Gaia had not acquired 40,000 paying subscribers in June 2019. Targeting a LTV/CPA of 3.5/1.0 has helped reduce average CPA for the quarter to $77. As mentioned before, Gaia is still experiencing higher churn than expected due to its rapid subscriber growth efforts in the past. Retention is anticipated to improve as the vintages mature towards the crucial two-year plus mark. As the size of the mature subscriber base grows, the impact of newer higher churn subscribers should diminish. I assume the improved LTV/CPA benefit plateaus at a CPA of $75 for the forecast period in the spreadsheet as it is already at historic lows. But management is more optimistic, citing efforts such as the scaling up of the member referral program and the campus and Live Access offering to increase average revenue per subscriber at modest incremental costs which, in turn, should drive cash flows at lower subscriber levels than estimated previously.

The end of September 2019 positive EBITDA target looks achievable aided by the acquisition of 40,000 subscribers and tight cost control over the next few months which will constrain subscriber growth. Regarding longer-term targets, even keeping operating expenses pretty flat out to Q2 2020E shows achieving positive net income by early H2 2020 is going to be pretty tight. But the key is for the average revenue per subscriber to drive revenue growth while a more modest subscriber growth and lower churn should help to subdue customer acquisition costs and overall headcount expenses.

Cash flows

Sources: Company filings and author estimates

Looking at the quarterly cash flow projection above, I have estimated depreciation and amortization to rise due to the recent campus improvements which are now largely complete. Though the campus-related capex should return to nominal levels, Gaia is budgeting $10 million to $11 million of content spend over the next 12 months before it starts generating positive free cash flows. The Live Access show hosts should drive incremental content spend as they have committed to recording 13+ episode series with Gaia. Management emphasizes that due to Gaia's low cost of in-house production, the content is probably worth more than double the cost Gaia incurs versus external production. In addition, Gaia is able to strategically fill gaps in its content catalog. Assuming capex remains within the budgeted range, Gaia does seem to have sufficient liquidity to reach free cash flow break even by early H2 2020 but there is not much room for error.

Key takeaways

Management is guiding Gaia towards EBITDA profitability by the end of September 2019. Looking at the Q2 2019 numbers, that goal certainly looks within reach particularly with the acquisition of approximately 40,000 subscribers in June 2019. Insiders seem bullish with CEO Jirka Rysavy buying over 100,000 shares in August 2019. However, meeting the free cash flow positive target early H2 2020 really depends on the existing monthly subscriber base being largely insensitive to the January 2020 price increase. In addition, the success of new initiatives like Live Access and the member referral program are also important.

Churn remains a concern which will elevate CAC if the subscriber base does not mature in line with management's expectations. Further parts of management's guidance seem to be moving targets, one recent example being the lower revenue growth rate projected for H2 2019. Now that Gaia has mortgaged its corporate campus, further sizable debt options are somewhat constrained and though management forecast existing liquidity should be sufficient to reach self-funding growth levels, there is not much room for error in my view. I remain long and continue to hold the stock but will only add as targets are met.

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.

Additional disclosure: 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.