Gaia, Inc. (GAIA) CEO Jirka Rysavy on Q3 2019 Results - Earnings Call Transcript

Nov. 04, 2019 9:21 PM ETGaia, Inc. (GAIA)
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Gaia, Inc. (NASDAQ:GAIA) Q3 2019 Earnings Conference Call November 4, 2019 4:30 PM ET

Company Participants

Jirka Rysavy - Founder, Chairman and Chief Executive Officer

Paul Tarell - Chief Financial Officer

Conference Call Participants

Eric Wold - B. Riley FBR, Inc.

Steven Frankel - Dougherty & Company LLC

Mark Argento - Lake Street Capital Markets

Dillon Heslin - ROTH Capital Partners

Operator

Good afternoon, everyone, and thank you for participating in today’s Conference Call to Discuss Gaia’s Financial Results for the Third Quarter ended September 30, 2019.

Joining us today are Gaia’s CEO, Jirka Rysavy; and CFO, Paul Tarell. 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, 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 Security 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. Thank you. Please go ahead.

Jirka Rysavy

Thank you, Rochelle, and good afternoon, everyone. Revenue in the third quarter increased 25% to $13.7 million from $10.9 million in the year ago quarter. We ended the quarter with 595,000 subscribers as planned. We increased the ratio between the subscriber lifetime value and cost to acquire subscriber to 4:1 early than expected and are doubling the 2.1 ratio we had during the same quarter last year. The cost of marketing as a percent of revenue decreased significantly to 49% of revenue from 125% in the same quarter of the last year.

We successfully completed our first full scale live streaming event in the Gaia Sphere on our campus and also our $299 Live Access subscription runs ahead of our expectations. We reached a positive EBITDA in September and months earlier than planned on 25% of revenue growth, and we plan to upgrade with both positive EBITDA and positive cash flow from operations from now on.

End of the quarter, we have $11.6 million in cash. We expect to reach positive earnings and free cash flow in July with annual growth rate of about 30%. Revenue growth in the – for the fourth quarter should be in mid-20s, and first quarter next year high-20s and then – and 30% for full-year of 2020.

And Paul will now speak more to the results. So good ahead.

Paul Tarell

Thanks. Revenues in the third quarter increased 25% to $13.7 million compared to the year-ago quarter, ending with 595,000 paying members. Gross profit in the third quarter increased to $11.9 million from $9.6 million in the year-ago quarter, with a slight decrease in gross margins to 86.8%, compared to $87.3% in the year-ago quarter, but up sequentially from 86.4% in the second quarter of 2019.

As noted on our last call, the primary driver of this change is increased content amortization, tied to growth and content spending, which includes several new series hosted by the marquee talent we have attracted to our platform with the live Gaia Sphere offering.

Speaking of which, we have completed our first three live events at the Gaia Sphere with great success. The October event was sold out with 300 people in the audience at an average ticket price of $750. We utilized the free hour of online viewing on Friday night to drive incremental awareness and interest in the event and capture e-mails.

Targeted marketing to this audience over the weekend allowed us to convert many of these viewers to active members in our $299 Live Access plan with the current traction exceeding our internal expectations,

Operating expenses, excluding marketing and member acquisition costs in the third quarter were $7.6 million, which is up approximately $0.9 million from the second quarter of 2019, due primarily to increased depreciation and other expenses related to the Gaia Sphere.

Our gross profit per employee increased to 344,000 during the quarter, which is up from 273,000 in the year-ago quarter. Total member acquisition costs were $6.7 million, or 49% of revenues, which improved more than 50% from the year-ago quarter, where we spent $13.6 million, or 125% of revenues.

We have been focused on increasing the lifetime value to CPA ratio this year by both improving lifetime value and reducing CPA. Average CPA for the quarter was down significantly from $91 in the year-ago quarter to $67 in the third quarter of 2019.

As discussed on prior calls, member referrals have been a significant focus of our member-driven growth initiatives. So I’m excited to announce that we recently released new sharing tools we have been testing over the past year to the entire member base. With these tools, members can share Gaia content anywhere via unique link that is active for 24 hours.

In addition to the direct conversion opportunities from the sharing, we are also gathering qualified leads that we can communicate with to drive conversion to paying members for a negligible CPA. The early traction from the share functionality is encouraging and we expect this to drive increased engagement with our content and support continued improvements in CPA going forward.

We have made meaningful progress on our path to becoming EBITDA positive during 2019, reducing our EBITDA margins from a negative 75% in the fourth quarter of 2018 to negative 7% for the full third quarter of 2019. We did achieve our goal of crossing over to sustainable positive EBITDA for the month of September. This, combined with our negative working capital model, allowed us to generate positive cash flows from operations for the month of September and reduced our cash flows used in operations for the quarter to $0.7 million, down from $6.3 million in the year-ago quarter.

Effective October 15, 2019, we have returned to a two-week free trial and eliminated the $0.99 charge. This is consistent with the pricing model from those content subscription services and brings us in line with consumer expectations. This will not meaningfully impact revenues, but will impact the reported member count for the fourth quarter, as we will not be including trials in the member base going forward.

Even with our counting trial members, we expect to end the year around 600,000 paying members. For comparison purposes, we had approximately 38,000 members in the $0.99 trial period at December 31, 2018.

We expect cash utilization to significantly reduce in the fourth quarter of 2019 and in the first-half of 2020. With our current cash balance of $11.6 million, disciplined expense management, continued improvements in retention, the early traction from Live Access, we’re comfortable with our ability to get to sustained free cash flows in July of 2020, with 30% annual growth with our current liquidity.

With that, I would like to open the call up for questions. Rochelle?

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] And our first question, we’ll hear from Eric Wold with B Riley.

Eric Wold

Thank you. Good afternoon. A few questions. I guess, one, I guess, now you’ve achieved the positive adjusted EBITDA for the month of September, reaffirmed the guidance of getting to positive free cash flow by July. Can you give us a sense of kind of the major underlying drivers included in that guidance? I guess, specifically, how do you see subscriber acquisition costs and content spending trending over the next couple of quarters relative to our current levels?

Paul Tarell

Sure. So I’ll answer on the customer acquisition costs and I’ll hand it over to Jirka to talk about content. From a customer acquisition perspective, we’ve settled into pretty much the absolute dollars that we’re willing to spend quarter – quarter-to-quarter. So that’s going to stay relatively flat as we look into next year, with revenue continuing to grow as well, increase the EBITDA margins that we’re able to drop down through cash flow from operations, which will start to be able to offset the investment that we’re making in the content.

Jirka Rysavy

It’s – you might kind of do something on your side, there’s some noise from your side. On the content, we’re actually increasing content spend about same as revenue, about 30%. Obviously, we can reach the positive free cash flow earlier if we would limit the content spending, but we don’t plan to do that. I think we in a very good trajectory.

Eric Wold

And what would be the total content spend this year and total CapEx spend this year? And then what part of that CapEx is non-recurring, it was due to the build out of the live events there?

Paul Tarell

I don’t have the numbers for the full-year, but we guided last call that we were going to be spending about $3 million to $4 million a quarter on content and then probably another $750 million to $1 million on the product side of things. The non-recurring stuff related to the Gaia Sphere build out is all in the rearview mirror at this point.

Eric Wold

Okay. And then lastly, on the 299 premium subscription, at what point does that need to get to, I guess, one, to kind of meaningfully impact results on a positive basis? And then probably more importantly, you would start seeing consumers gravitate towards that plan in order to kind of reduce your kind of spending needs due to the same kind of revenue growth?

Paul Tarell

Yes. I don’t think we need anything per se. But what was interesting about the three events that we’ve had so far, a lot of the people that are signing up for Live Access are net new members. They’re actually not upgrades. So that’s a positive for us in terms of looking at the talent that we’re bringing in and their ability to attract new people to Gaia.

In particular, this October event, it was unique content that’s not available anywhere else with a host that’s pretty hot right now. So that drove a lot of awareness, which will be able to capitalize ongoing into the rest of this year. So there’s not any need for certain penetration rate. We’ve adjusted our spend levels on customer acquisition costs down to the point, where anything that we get from a conversion to Live Access is all incremental margin.

Eric Wold

I guess, one last one for me. And I guess, whether you know it or not, whether you want to share. And I guess, if you look at the – I know you’ve only had three events so far. But if you look at the combination of those who attended live event, as well as those who didn’t attend, but paid up to stream them live, what percentage of those were complete new members? I’m trying to get a sense to kind of how much these – the people you’re bringing into the live events are kind of attracting their own followers into Gaia?

Paul Tarell

I think it depends on which talent you’re talking about with the three events that we’ve had. Gregg, [ph] who was someone that we’d had, that was the June event. He’s someone that’s been on the platform for a while. So it wasn’t so much net new there. But [Carolyn and Joe], ph who were the August and October events were predominantly new members upgrading to Gaia, or signing up for Gaia at that 299 level.

So it’s just going to be a event by event basis. But over time, it’ll –as it builds, it’ll start to be more balanced in terms of upgrades and conversions, because we’ll have a better ability to market the events to members around the event, which is what we see is a good catalyst for conversion is the kind of the fear of missing out on the event and using that as a countdown to get people to upgrade.

Eric Wold

Sounds good. Thanks, Paul and Jirka.

Jirka Rysavy

Yes.

Operator

And next, we’ll move to Steven Frankel with Dougherty.

Steven Frankel

Good afternoon, and thank you. How many live events are on the calendar for Q4? And then how does that grow through 2020?

Paul Tarell

We actually purposefully scheduled a pause in the calendar for the rest of this year to be picking up in early next year. And what we’re looking at now is kind of these marquee ones that we are taking the risk with the talent of incentivizing them to do content with us, but also building what we’re calling Tier 2 and Tier 3 events, which are people that want to use our space that fit into our Gaia content umbrella.

But we aren’t necessarily funding at all. They’re paying the cost and then we’ll do a rev share on them. So it’ll be dynamic over time. But from the marquee perspective, I believe we have four locked in already with a fifth that we’re trying to nail down the date on.

Steven Frankel

Okay. And then how should we think about a sustainable growth rate of subs going forward?

Jirka Rysavy

Well, I mean, we really want to focus on revenue, because, obviously, for us to have a $300 member, it’s more important. So we didn’t – still hard to project what would be a ratio of this $300 member compared to others. But – so otherwise, we will try to focus, I said about 30% growth rate for next year, which probably will be somewhere to 20% to 20%-plus subs growth, but let’s say, 20%-plus subs growth, 30% revenue growth.

Steven Frankel

Okay, great. Thank you.

Operator

And next, we’ll move on to mark Mark Argento with Lake Street Capital Markets.

Mark Argento

Hey, good afternoon, guys. Congrats on hitting that EBITDA positive in September. I know you had mentioned still think July 2020 and the free cash flow positive. How much cash do you think you’ll consume between now and free cash flow in July?

Paul Tarell

We’re not going to provide specific guidance on what that looks like. But we will tell you that with getting our cash used in operations to sub-$1 million this quarter that gives us more breathing room as we look at the content investment. But it’s important to note that the content investment is entirely discretionary based on what we are looking at in terms of traction.

So if we need to pull back for whatever reason we can, there’s no contractual commitments that tie us to a specific level of spend. So we’re committed to getting there with the cash that we have on the balance sheet today.

Jirka Rysavy

The content, it’s very different from what we see compared to industry. We have no pressure on content and we don’t also have really a big need to do more content. We have a plenty – the number of titles we have with the U.S. library is probably almost double what Netflix has right now. So we don’t end up product growing in pressure. So we clearly can lower – we now are steadily growing content spend about same as revenue 30% and we clearly don’t have to do that.

So that’s kind of also depends. We can easily adjust that for a few million dollars, even more than that. And so – but even it’s the content spend, we should have adequate cash to get to the positive free cash flow. Also, we have reached EBITDA earlier than planned and with the traction what we have on our Live Access, we don’t expect any issues there.

Mark Argento

Got it. But putting content investment aside, the operating losses should continue to decline. You don’t see any seasonality in terms of cranking up spend for the holiday quarter, or how do you think about the seasonality of the biz?

Paul Tarell

Yes. We’ve actually done a really concerted focus of reducing the need to do that type of spend on paid media. The majority of what we’re focusing on in Q4 is either A, converting people that were exposed to the events that we had that hadn’t signed up for membership. And as I mentioned in my prepared remarks, really enabling our members to share Gaia to help contribute to the number of impressions that are out in the world that we’re not paying for. And that’s going to be a significant difference from what we would have done in the prior two Q4s, where we had to spend media dollars to get that awareness.

Jirka Rysavy

We also in – as I said, we plan to upgrade positive EBITDA and operating cash flow from now on. And as far as free cash flow, the use of cash will decline every quarter meaningfully. So it’s the trajectory between now and end of the second Q should be pretty – it will go down every quarter.

Mark Argento

Got it. And just pivoting a little bit, I know you made a small acquisition last quarter, added some subscribers. What do you see in the landscape from an M&A perspective? Are you actively out looking for a more content or subscriber base is out there? And how do you see the overall streaming market playing out?

Jirka Rysavy

This acquisition, we actually tracked and talked to those people for three years and find out that that was a very good complementary on several scales. There’s a bunch of small acquisitions. We looked at it about three years, we really scoped with plan. There are a lot of people [announced some] [ph] small acquisition available.

However, it’s not that we would be afraid. I did over three high acquisition in my life. But it’s not – in this model, it’s not really acquiring what we need to. There’s clearly built to buy analysis. And you want to get some other benefits with this acquisition. So we don’t plan the acquisition to be any meaningful, at least, for right now meaningful part of our growth.

So when we talk about next year growth rate, it’s – we kind of assume that’s all organic. But there can be – if you find out, we can do one acquisition into it, but it wouldn’t be like addition, we would just kind of replace certain spend by acquisition. So we’ll be about the same impact on the cash flows and stuff.

But while there’s like a few we can look at, I think as they come, there’ll more to establish the international markets then pick something in the U.S. But there is three or four acquisition in U.S. we can look at, but it’s not right now in our active discussion even internally. Thank you.

Operator

[Operator Instructions] Next we’ll move to Darren Aftahi with ROTH Capital Partners.

Dillon Heslin

Hi, guys, this is Dillon on for Darren. Thanks for taking my question and congrats on your September EBITDA. So just sort of on the organic front with what’s the traction you’re seeing there, you talked about some of the tools you’ve rolled out. Do you have some additional sort of tools that you’re looking forward to help layer on, on top of that organic – the organic growth you’re seeing? And is there an incentive for your users at all to send out that 24-hour link, or do you plan on some sort of program?

Paul Tarell

So first of all, the – I’ll answer them in the reverse order, because it’s a progression of how we’re thinking about rolling it out. So the first thing we wanted to do is be able to give members the ability to share Gaia content. Historically, we had this functionality, but we limited it to a couple of shares a quarter. So we really got a scarcity mindset into our member base.

So what we’ve been doing now is rolling it out as a – basically retraining behavior. You can share it as much as you want and incentivizing people will come from identifying people that are good at sharing and getting members to convert and then reaching out to them about bringing them into our ambassador program, where they can actually start to earn money.

The majority of people that are bringing in sub-10 members are just doing it, because they want to share Gaia and get people around them, able to talk about the things that they’re into and that’s enough intrinsic motivation. But my team is working on building out progression from people that can get to five to 10 and then help growing from there. And we have a couple of people that we’ve identified through the sharing program that have become the ambassadors that are now into – well into the 100 member referrals – retained member referrals.

So where it goes from here is the ability to give more than just one piece of content, something that we’re calling member portals, which should be coming out next year – early next year is the ability to actually curate Gaia experience that you can use as a landing page for people to come to Gaia and experience the version of it that you want them to experience versus just dumping into the broader library.

So those are all coming. We’ll be doing a scaled roll out of that. We’ve been testing with some of our bigger ambassadors now to make sure the functionality is what we want it to be. But the intent would be that, that could be available for any member into the future and really about building out that community.

And then where it goes from there from incentives and rewards, we do have some plans, but we’re still shaping them. So I don’t – I’m not ready to comment on that yet. But I would say, each quarter from here, you should hear some incremental improvements in that functionality from our side.

Dillon Heslin

Great, thank you. And then on live events, with some of the success you’ve seen so far, do you think that you’ve optimized sort of the ticket price, or do you think that there’s some more upside there?

Paul Tarell

I think if you took a queue from anything that is a finite number of seats, you get a lot better at understanding demand as you look at pricing. So with three events and we’ve made some improvements there and average ticket prices come up as a result of that. But it’s really going to be talent-specific in terms of how much demand is there for a given seat.

But what we did with this one was, there was enough interest in a higher-level price point to get preferred seating and a meet-and-greet. So I think it’s going to be more about revenue up-sell opportunities around the experience versus the ticket price being something that needs to change meaningfully.

Dillon Heslin

Got it. Thank you. And then just on the international side, how are things trending there? Sort of what are you seeing? And have you invested at all in anymore content translations?

Jirka Rysavy

Well, internationally, with the sustainability part, we don’t really aggressively market international, because there’s always more testing if you go to new market. We – our goal was over the last nine months, six months, especially to get what we call parity, which means then when you have information, if you subscribe from Germany that your experience is like German, not till before, you still had some issues that you can see everything in German. But if we get an e-mail, we answer in English or something.

So to upgrade at a staff, so we have everybody bilingual who deal with that who’s German is their native. And so experience for somebody who subscribed from, say, Europe, it’s kind of same as we would operate there. So that was our main thing. We kind of slowly growing international. We probably, as we get cash flow positive, we will kind of expand little more on that side.

But for right now, it wasn’t the main focus for us, as we kind of focus everything and get positive EBITDA. Obviously, by getting to positive EBITDA now, everything kind of relax, begin there earlier, and the – all the signs are very positive from where we at. So our main things right now is what we call member-driven growth. And that’s pretty much over next quarter or two will be the main driving focus for the company.

Dillon Heslin

Thank you.

Operator

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Rysavy for closing remarks.

Jirka Rysavy

So thank you very much and thank you, everyone, for joining, and we look forward to speaking with you and we will report our annual results in February. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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