Gaia, Inc. (GAIA) CEO Jirka Rysavy on Q2 2021 Results - Earnings Call Transcript

Gaia, Inc. (NASDAQ:GAIA) Q2 2021 Results Earnings Conference Call August 2, 2021 4:30 PM ET

Company Participants

Jirka Rysavy - Founder, Chairman & Chief Executive Officer

Paul Tarell - Chief Financial Officer

Conference Call Participants

Mark Argento - Lake Street

Eric Wold - B. Riley Securities

Darren Aftahi - ROTH Capital Partners

Peter Rabover - Artko Capital

Operator

Good afternoon, everyone. And thank you for participating in today's conference call to discuss Gaia Incorporated's Financial Results for the Second Quarter ended June 30, 2021. 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 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. Please note that today's call is being recorded.

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

Jirka Rysavy

Thank you, Jenny. And good afternoon, everyone. Revenues for our second quarter increased 20% to $19.4 million with 770,000 members. Gross margin was steady at 87.1%. Even with 20% of the revenue gross, our operating expenses in dollars actually slightly decreased improving significantly as a percentage of revenue to 84% from 101% a year ago.

Net income improved by $3.1 million to $600,000 or $0.03 per share from net loss of $2.5 million and $0.13 loss. As a percentage of revenue, this represented an 18% improvement.

Our EBITDA improved to $3.9 million, which is now 20% of revenue from $800,000 and 5% of revenue in the year ago quarter. These improvements were driven by an increase in gross profit for employee of almost $100,000 or 23% to $535,000 from $436,000.

And Paul will now talk - speak to you more about the results.

Paul Tarell

Thanks, Jirka. Revenues for the second quarter increased 20% to $19.4 million with gross margin steady at 87.1%. This marks our fifth consecutive quarter of revenue growth over 20%, while generating positive income and EBITDA.

We ended the quarter with 770,200 paying members. Total member acquisition costs during the quarter were $7.7 million or 40% of revenues, which improved from 52% of revenues in the year ago quarter.

The digital advertising market continued to be crowded and competitive during the quarter, which caused an uptick in our per customer acquisition cost to $74. Even with this uptick, our lifetime value to customer acquisition cost ratio is still over 4.5 to 1.

Despite the challenging paid media market, we were able to drive 20,000 net adds during the quarter, while staying within our overall target spend level. Our net growth for the period benefited from an annual renewal rate, north of 60%, for the large cohort of annual members we added during the lockdowns that occurred in the year ago quarter.

The strong renewal rate of the COVID cohort as the world has started to reopen and a variety of new streaming services have been launching is a testament to the quality and size of our original content library and our focus on an underserved niche audience. We also saw the benefit of early traction in our Ambassador program that our new internal sales team has been focusing on scaling globally.

Selling and operating expenses, excluding marketing and member acquisition costs in the second quarter were $7 million or 36% of revenues, which improved from 37% of revenues in the year ago quarter. Corporate and G&A expenses in the second quarter improved to $1.5 million, down from $1.8 million in the year ago quarter.

EBITDA improved to $3.9 million or 20% of revenues in the quarter from $0.8 million or 5% of revenues in the year ago quarter. Again, this marks our fifth consecutive quarter of generating positive EBITDA and the first quarter we have reached the 20% threshold.

We generated net income of $600,000 or $0.03 per share during the second quarter of 2021, an improvement of $3.1 million from a net loss of $2.5 million or $0.13 per share in the year ago quarter. We've been able to flow through to net income, almost 100% of the incremental revenues generated in 2021 compared to the same period in the prior year.

Cash flow from operations increased to $4.3 million during the quarter, an improvement of $2.4 million from the second quarter of 2020 and our seventh consecutive quarter of generating positive cash flows from operations.

We increased our content investment during the quarter as planned, while also increasing our overall cash balance to $13.7 million. With 80% of our monthly viewership on original programming and our end-to-end content production fully in-house, we have continued to control the cost on a per hour basis to ensure that our new content is providing a high return on investment at our current member levels.

Live events have restarted in full swing with a successful event completed in July and upcoming events each month from August to November. As we look to the second half of the year, we are putting our energy into growing the premium membership tier. We will be utilizing the upcoming events, combined with a growing Ambassador network to promote the $299 premium annual offering to new potential members, as well as a concentrated focus on educating current members on the additional value of this premium offering.

This will allow us to continue to drive revenue growth and profitability, while reducing the business model's dependence on paid media spend to drive member growth.

Monthly ARPU or average revenue per user for the premium offering is $25 compared to our current blended monthly ARPU of $8.50 with operating margins on the incremental revenues north of 50%. As a result of this focus starts to compound, we expect to generate higher operating margins at similar revenue levels resulting in increased profitability.

With that, I'd like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you [Operator Instructions] And we will go to our first question from Mark Argento of Lake Street.

Mark Argento

Good afternoon, Paul. Good afternoon, Jirka. Nice quarter. I just wanted to drill down a little bit on the premium. Maybe just talk a little bit about what incremental content you get, is there a live component to that? And then I just wanted to also talk a little bit about the Ambassador program, if there's any updates on that as well? Thanks

Paul Tarell

Sure. So from the premium offering perspective, the events in our Gaia Sphere Event Center here, the incremental content that those members get. And because of COVID and the restrictions, we weren't able to produce any new content in 2020 or the early part of 2021.

So now we've had, as I mentioned, the July event, and we have events each month from August through November. So not only do we have the catalog of the events that have already been completed, but we have these upcoming ones that are coming as well. And we expect to be able to roll out the 2022 preliminary calendar sometime in the fall as well.

So from a value perspective, it's really about getting that access to the conference style or workshop style content, as opposed to the kind of lean back, watch on your couch type of content. So that's really the key there.

And it's fundamentally intertwined with the ambassador program because if you think about the price point of the premium subscription tier. It's a lot more lucrative for our ambassadors to be promoting and marketing those events and that premium tier because of the way that the rev share economics work.

So we - as I mentioned on the last call, we had our SVP of sales start March - beginning of March. She's ramped up and starting to hire and the ambassador network is starting to grow.

Mark Argento

Great. And then just one other quick one. In terms of the EBITDA margins look to be pretty strong. In terms of any philosophy around EBITDA, if you hit a certain threshold, accelerating growth. I know you'd been playing around. At one point you had going to plot everything back and when the market didn't look as good, you kind of throttled that back and were able to togged [ph] kin of on and off here.

Any thoughts on now that you're generating cash, look like your incremental margins are significant to think about reaccelerating the growth rate? Or what do you do with that extra free cash as it starts to pile up?

Jirka Rysavy

So as a kind of vision, we definitely, kind of, said at the beginning of the year, we'd like to refocus a little bit more on growth on next year, I'll be talking, 2022, while we still want EBITDA margin to grow. So there is a lot of leverage. When you see how much we're contributing for an incremental revenue. So - but we'd like to absolutely refocus on growth from starting next year.

So it's really why the MBA [ph] site network. It's kind of what's going to be a main undergrowth factor. But as Paul said, you know, for us, because since we really focus on profitable and cash flow as well, to getting more our members to subscribe for our premium because there's a big difference, obviously, if you pay monthly $8 or $25 because the costs are very similar. So we wouldn't like to also put some focus on getting more people in a premium because of profitability.

So you're going to see probably from now on a revenue and the subscribers kind of a little divergent because the revenue will grow more as more people subscribe to the $300 membership.

Mark Argento

Great. Thanks, guys. Appreciate it.

Operator

And we will move to our next question from Eric Wold of B. Riley Securities.

Eric Wold

Thanks. Good afternoon. So a couple of questions. I guess, Paul, you mentioned obviously the focus on the Ambassador program and the premium subscription will lessen your dependence on paid media, as that becomes more competitive during the economic restart.

Maybe just give us a sense of how you - for what you are spending on paid media, how have you pivoted spend? And have you kind of shifted where your focus is kind of to kind of get more bang for the buck or kind of have you adapted?

Paul Tarell

Yeah, it's a good question. I think that there is a couple of things at play here. One is the reopening as you as you mentioned. So there's a lot more advertisers coming into the digital space than there would have been historically at this time of the year.

The second piece that we have is the iOS 14 and the privacy restrictions that have rolled through there, a lot of the tools that digital advertisers historically used for performance-based marketing have started to become a bit challenging as the various app providers respond to Apple's changes in their terms of service there.

But for us, we really focus on using first party information to go after our audience where they are. And for us, that means that we've been able to move pretty heavily away from paid social media over the last year plus.

And now YouTube is starting to become more worthwhile for us, both in terms of the cost but also in terms of the volume that we're able to drive from it. And then just the bread and butter paid search and SEM, those are really starting to build for us as we continue to grow our reach and size and scale globally.

Jirka Rysavy

And also, kind of, in perspective, as we took the marketing as a percentage of revenue from 52% last year to 40% this year, that's also give us a little bit of restriction, but we obviously try to control that spend. So that also put that to this kind of the drive for premium members.

Eric Wold

Okay. How should we think about over time, as you maybe get less dependent on paid media and more towards Ambassadors and kind of you know, how they will be compensated. How should we think about how that shifts your spend kind of philosophy in total. Is the total dollar amount kind of unchanged as kind of moving the buckets? Or did you actually get more efficient on the lower spend?

Paul Tarell

So I think it's - the way we think about it is as a percentage of revenue. So today, we're in that 40% target range. As we look at the economics of the Ambassador model, we're trying to move that closer to 30% of revenues all in. So as you get more shift to that channel, then you can bring the marketing as a percentage of revenue down, while still driving the growth rates that we're targeting.

And then in the future, that would allow us to potentially allocate more of the revenue to content. If you remember, we said 20% is our target for the near and mid-term. But ideally, I'd like to see that longer term more in balance with the marketing spend as a percent of revenue.

Eric Wold

Fair. Then just final question. The 60% renewal rate for the kind of the lockdown cohort of subscribers. Was that for those that joined on the annual plan? And if so, do you have any kind of a sense of how successful you were retaining one that kind of came on a month-to-month and maybe later come back and kind of aspect there.

Paul Tarell

Yeah. That was just for the annual plan. The monthly people behaved very similarly to how our monthly members behave independent of COVID, albeit in a bigger way. But what we do see is that with our content that we're continuing to push out and promote. We do get a decent number of returning monthly members that might cancel or go away for a few months and then come back and resign up.

And we've actually implemented a product feature where a monthly member can put their account on hold for up to three months, so that we don't lose them from a churn perspective and then they have to resign up, and we're seeing some positive trends there for people that might just want to take a couple of month break and then come back without losing visibility into them.

So that's a positive for us, as well as we've seen pretty consistent monthly member behavior that they want the flexibility to pay as they use it, but they also have high intent of coming back.

Eric Wold

Helpful. Thanks, Paul.

Operator

And we'll go to our next question from Darren Aftahi of ROTH Capital Partners.

Darren Aftahi

Hey, guys. Good afternoon. Thanks for taking my questions. Just first, how aggressive were you in terms of marketing spend in terms of upselling subs on the premium products are just going after new growth as in general?

Paul Tarell

Most of our marketing initiatives in the quarter were focused on going after subs in general because if you recall, we didn't really get out of the - the shroud of capacity restrictions until mid-Q2. So we really didn't want to put any major emphasis behind the events in case we had to pivot it at all.

However, thankfully, and in Colorado, we've been moving more and more to clear and open, which has given us more confidence in our ability to have the events and therefore, start to push on it.

But I'd say the primary focus is around educating and converting existing members to that higher price point and then using the talent that are coming in around their events and whatever marketing they might have on their own to really drive the new audience acquisition for the premium offering.

We have a relatively visible in the social media world, talent coming in for the September event, and we expect that to be a pretty good catalyst for us. With their show launching in August and then the event in September, we'll be able to feed into not only members but also the upsell opportunity for the premium members.

Jirka Rysavy

But also over the last three, four quarters, our - a lot of focus would still really make sure we stay profitable with positive cash flow, weren't on the level of when we are right now, we can spend more time thinking about the growth because, with the growth that we have really put as much more solid weigh on the profitability equation. So as Paul said, now it's kind of more focused on what's the next step and try to accelerate growth as we go to the next year.

Darren Aftahi

And then on International, like out of the 20,000 ads in the quarter, like what was mix? And any markets you would kind of call out? And then as you your point about accelerating growth, like how pivotal is critical, excuse me, is international to that acceleration in growth?

Paul Tarell

Yeah. I wouldn't say it's critical, but it's definitely one of the levers that I like having at my disposal, particularly as we see the US paid media market getting saturated and the price is going up, that's not the same case around the world. We've actually seen with our Spanish offering and our focus on building Ambassadors that we've actually seen quite a bit of traction on the Ambassador front in Mexico, Central and South America, which while that didn't contribute meaningfully to the quarter's net adds, it is building the capability for us to continue growing more in the future down there.

So that was a big area of opportunity for us that we saw, and we couldn't do it with our traditional marketing initiatives. So this is a way for us to get more word-of-mouth marketing in those regional areas down in Central and South America.

Darren Aftahi

And then just last one for me. Given inflation is prevalent everywhere, I know you guys run your own content house. Is there anything in the logistics of creating content that has actually increased the cost to produce that for you guys in-house, say, versus 2019 levels? Is it baseline?

Jirka Rysavy

No, not at all. It's actually, we invested a lot of money early to try to avoid that because pretty much all our content is done with our full time employees. We don't see that pressure at all.

So I mean, we might be having a little more like music in all the shows and more animation. So we consciously, kind of, increased our production quality with number of subscribers, but it's total internal, doesn't really - we have virtually zero pressure from outside on any content cost.

Darren Aftahi

That’s good to hear. Thanks, guys.

Operator

[Operator Instructions] And we will go to Peter Rabover of Artko Capital.

Peter Rabover

Hey, guys. Just so I was, kind of, curious you guys have been doing this for about five years, and congratulations on getting to almost 800,000 subscribers. I'm curious whether you have a little bit better idea on your total addressable market, like what's changed in the last few years, what you've learned, whether you've discovered new potential clients or - and maybe some have taken off. So any color on that would be great.

Paul Tarell

Yeah. I will say, anecdotally, I see our addressable market expanding every day with the world events that are going on around us and now mental health and some of the challenges of separation becoming more and more prevalent. I see a lot of opportunity from that perspective to be a resource and helping people move through to the other side of this, whatever that looks like for them.

We stay away from things that drive separation and really try to not use fear in any of our content. And I think that will start resonating with more and more people as we move through the current situation that is going on around the globe.

And then we also obviously have the benefit of investing in Spanish, French and German, which wasn't really part of our original addressable market when we started with English only. So we have expansion there.

And then the third piece that we have is obviously within our ability to mine our data and start to call out sub-segments of our existing audience that we can start to produce content for. We're able to take, if you will, niches of niches and actually start to give them some love and get them to grow and then use that to go out and grow the audience as well.

So I didn't answer your question with any specific numbers, but I would say that our early targets for our total addressable market just continue to grow as more and more households move digital first and get comfortable streaming and then also as people become more aware of the content and the topics that Gaia covers and the fact that we're a pretty exclusive resource for the depth and breadth of content that we bring and the technology that we use to deliver it. So I'd say everything is going in the right direction from the addressable market perspective.

Peter Rabover

Great. Thanks so much for that color. And then maybe I think like the media industry is kind of - I don't want to use word turmoil, more of an influx in the last few years. And I'm sure that affects certain ways you guys look at from business development to content focus to customer spend to potential combinations.

So I'm just curious whether you guys have any thoughts or color that you would be willing to share with us, I guess, your thoughts on the current state of the media industry and where you guys think you fit into that funnel?

Paul Tarell

That's a lot of questions there.

Jirka Rysavy

Yes. It's definitely wide question. But I think it's like even five years ago, a lot of question was about validity of streaming, right, for different markets, different segments, I think that's totally disappear right now. You have a lot of players who kind of launched their business, some of them struggle, and they start to combine to create like better offering.

And you start to see a difference in quality of execution. If you compare, like, say, Netflix compare like Peacock, it's night and day. Obviously, Netflix has a benefit doing it longer and kind of debugging it.

So some of the players day subscription quality is still kind of lagged behind the standard, I would say, let's say, Netflix being a standard right now. But definitely, there are new market entries, so make it more difficult on the advertising market.

On other side, it's really more overall than we would see competition in our size that we didn't really see any entries in our space. And we want to kind of keep staying being in a niche. But there's definitely defining the market will happen and still going to happen. It's kind of what is this offering looks, how would you expect to have and not have it's changing.

But overall, it does not affect us much. We didn't see a short of - we didn't you see a kind of like a year ago, virtually everybody they knew how to deal per se was the new restriction, the COVID restriction. So the advertising market gets much looser. Now it's more tightening.

Probably - I'm not sure how much is the impact, but there's probably some impact in Olympics, but I wouldn't see that really affect us that much. But there's definitely some.

So you have these events as you kind of typically media events. But I think the whole advertising market is developing. You have changes for Apple-driven with the way how they control the iPhone. So you have to always adjust to it, but I would say from our point is not directly impacting us. I think it's much more what we do than what other people do.

Peter Rabover

Okay, great. I really appreciate you're giving in a thorough color. And I like somebody else take the question.

Jirka Rysavy

Thanks, Peter.

Operator

And so 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

Thank you, Jenny. And thanks to everyone for joining, and we look forward to speak with you when we will report our third quarter, which will be in early November. Thank you very much.

Operator

And so ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.