The Beachbody Company, Inc. (BODI) Q4 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Beachbody Company’s Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Eddie Plank, Beachbody’s Group VP of Investor Relations. Please go ahead.

Welcome, everyone, and thank you for joining us for our fourth quarter 2021 earnings call. With me on the call today is Carl Daikeler, Co-Founder, Chairman and Chief Executive Officer of The Beachbody Company; and Sue Collyns, President and Chief Financial Officer. Following Karl's and Sue's prepared remarks, we'll open the call up for questions. Before we get started, I would like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, which includes today's press release. Today's call will include references to non-GAAP financial measures, such as adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. Now, I would like to turn the call over to Carl.

Thank you, Eddie, and good afternoon, everyone. Our fourth quarter performance reflects our disciplined execution against the plan we laid out in November. The plan was to increase focus on prioritizing the highest return marketing opportunities, improve the cost of subscriber acquisition to lifetime value ratios, capitalize on new product launches and tightly manage expenses and we did just that. These efforts in conjunction with the multiple new revenue streams we developed in 2021 delivered results that were ahead of our revenue and EBITDA expectations. Our fourth quarter performance is encouraging, but there's even more we're doing to make the business more productive and more efficient, while continuing to deliver growth that is scalable within our means. Near-term demand patterns will likely be variable but we're very confident in the long-term demand for at-home fitness and demand for our products that confidence is why we are taking decisive action to ensure we can deliver profits, cash flow and create long-term shareholder value in every type of demand environment, regardless of whether there are tailwinds or headwinds. And we're doing all of this while continually advancing our mission to help millions more people achieve their goals and lead healthy fulfilling lives. 2021 was a valuable year of making growth investments, which we are only just starting to deploy. Given that we're currently facing less predictable industry dynamics, we're determined to capitalize on the strengths we've built. To do this, we're moving quickly to focus on the strongest components of our business with the highest ROI and implementing actions to reduce operating and capital expenditures. As a result, we expect to reduce our cash burn by approximately $110 million in 2022 compared to 2021. And we're taking steps to deliver positive adjusted EBITDA in 2023. This is a playbook we know well. We built Beachbody on a foundation of strong free cash flow and profitability. It's how we grew from a single at-home fitness product over 20 years ago to a subscription-driven health and wellness platform with a synergistic combination of effective products, significant scale and attractive gross margins. And all of this is powered by the best library of original content in the industry, a unique network sales channel and a commitment to constant innovation. Sue will cover the financial details of the quarter shortly, but first I'd like to spend some time on our go-forward strategy and the actions already underway to accelerate our path to profitability and to strengthen our competitive position. I'll start with digital fitness. We're implementing a One Brand strategy to strengthen our ecosystem and align all our assets around a single platform, a platform with the best talent and a complete organizational focus on building from the foundation of Beachbody's superior economics and strong brand position. To accomplish this, we're integrating the products and talent from our Openfit platform, with our already extensive Beachbody on-demand library. This powerful combination will enhance our value proposition for all our subscribers. And as for our Connected Fitness bike, we believe our recently launched Q1 promotion combined with our extensive content library all united under the Beachbody brand, will accelerate bike sell-through and extend subscriber retention. Second, let's talk about marketing. Building on our actions in Q4. We are leveraging the investment we made in brand awareness in 2021 with disciplined marketing for efficient customer acquisition, enhancing the ROI on media spend by pursuing only acquisition opportunities that are immediately accretive to cash flow. Given our expectation that media rates will remain elevated and near-term demand patterns will remain somewhat unpredictable, we're targeting our media spend in 2022 to only the strongest channels while improving post-acquisition upsells to further enhance our CAC to LTV metrics even beyond the progress we made in Q4. In addition, by offering cost-effective subscription bundles, we'll more fully unlock the power of our coach micro-influencer network. That network is an absolute competitive advantage in the category. This is a channel that has consistently delivered our most profitable and productive subscribers, driven by real customer proof that our total solution approach works. And just as importantly, our coaches provide the accountability and community that are so critical for successful lifestyle change, changes that translate into strong and sustained engagement and retention among our subscribers. And based on conversations we've had with our most influential coach leaders, we know that they're very excited about the additional focus and synergy this One Brand approach will create. In the second half of 2021, we were managing significant expansion activities including the launch of our preferred customer program, the rollout of BODi, our new premium subscription tier and working the connected bike into the business model. With those developments now integrated into our ecosystem, we are leveraging those enhancements with the activity that generates momentum with each new program launch. And I'm incredibly excited by the cadence of new launches coming up. Our content launch calendar for 2022, is frankly the strongest in our history including, a significant brand new nutrition and fitness program launching in just two weeks. With new content launches throughout 2022, we believe our coaches will be incredibly well equipped with an abundance of new tools to drive customer acquisition and upsells enhancing both LTV and customer results. Next, customer lifecycle management is also an incredibly important focus for us to ensure we maximize the opportunity with each new subscriber, through our new data and analytic capabilities, we've identified attractive opportunities to drive LTV within our database of 2.8 million subscriptions that we're just scratching the surface on. For instance, we are identifying any friction in the purchase funnel and making it much easier for subscribers to order additional nutrition products, which will improve the ROI on each subscription and increase LTV.And we're creating exceptionally appealing and cost effective new bundles that will accompany our content releases with our nutritional supplements plus the BODi premium subscription content. Which brings me to our focus on capital efficiency. In addition to more efficient marketing spend, focusing on subscriber acquisition into our One Brand strategy and mobilizing around the cadence of new content launches, we're also taking a critical look at all our expenses to identify opportunities to increase organizational efficiency, to eliminate redundancies and to significantly reduce costs. To that end, in January, we engaged the consulting firm AlixPartners, to conduct a thorough technology review. We're leveraging their highly specialized expertise in assessing technology platforms to help us integrate, streamline and reduce capital spending without compromising the subscriber experience. The One Brand strategy is already reducing complexity, as we create a leaner organization that's more agile and appropriately sized for a variety of consumer demand environments. Through these actions, as well as, our technology integration efforts, we've reduced headcount by approximately 10%. We're also taking a hard look at every part of our organization, to focus on the highest return and proven projects and to increase the variability of our expense profile to always match the demand environment, as we test and roll out new concepts. Over the past two decades, a discipline of our company has been our commitment to evaluate our business through the lens of the current reality, with a willingness to adjust as conditions evolve. In the past, our most positive inflection points have all happened in environments like this when we were faced with our most challenging obstacles. In 2005, we addressed rising competition with the introduction of P90X and a suite of supplements. In 2016, we made the transition from DVDs to a digital subscription model. And most recently, in Q4 of 2021, we quickly and successfully retooled our performance marketing engine in the face of significant pressures in the media environment. The changes we're making now will serve to strengthen and more fully unlock the power of our competitive advantages. They include a reliable recurring revenue base, driven by multiple subscription streams and strong margin nutritional supplements. The most significant content library in the industry with over 4500 streaming workouts and nutrition content. A scaled platform with over 2.8 million subscriptions and a highly efficient marketing engine, honed over two decades complemented by the coach network, our proprietary sales channel with incredible LTV. Going forward our activities will leverage the synergies of One Brand Beachbody, the comprehensive fitness and nutrition brand with the greatest critical mass of content and services, incredible customer loyalty, a community that supports each other on our proprietary social media platform, all built on one of the most resilient LTV models in the industry. With a clear path to reduce 2022 cash burn by roughly $110 million and position ourselves to return to profitability in 2023, we are confident in our ability to continue to deliver on our mission to help customers achieve their goals and lead healthy fulfilling lives, while creating long-term value for our stockholders. So, that's an overview of our business activities. And now I'd like to turn it over to Sue Collyns to cover the financial details of the quarter.

Thanks Carl and good afternoon. I'll start with a review of our fourth quarter results and then provide context around our outlook for 2022. As Carl mentioned in the quarter, we adapted quickly to navigate the realities of a dynamic marketplace. We're now taking action to accelerate these efforts to ensure we're optimizing spend to support cost effective growth and a return to profitability in 2023. Now, turning to the details of the quarter. Total revenue was $216.3 million, declining 3.6% year-over-year, but increasing 31% compared to the fourth quarter of 2019. These results were ahead of our expectations largely driven by stronger nutritional bundles and higher Connected Fitness revenue as we delivered more bikes than previously guided in the quarter. Digital revenue was $81.9 million and this represented a 14% decline versus the prior year period, but a 41% increase on a two-year basis. Digital subscriptions decreased 3% year-over-year, but were up 50% compared to 2019. And while engagement was lower compared to the pandemic elevated levels of 2020, we saw a 220 basis point improvement on the full year versus 2019. Importantly, quarterly retention levels also grew on both year-over-year and a two-year basis. And this validates the strength of our offerings and provides a solid foundation for future growth. Connected Fitness revenue was $36.8 million with 23,900 bikes sold compared to 12,300 bikes sold in Q4 of 2020 on a pre-merger basis. We were pleased with the positive response to the integration of our content library on to the bike which drove higher demand, particularly within our coach network. Additionally, with bike inventory on hand, we successfully navigated the challenging supply chain and logistics environment to reduce delivery time. This enabled approximately 11,000 more bikes to be delivered in Q4 than indicated on our November 15 guidance. Overall, in Q4, we delivered 29,700 bikes achieving a strong delivery to sales ratio of 124%. This compares to the delivery to sales ratio of 44% in Q3, immediately following the bike launch when our sales and delivery logistics were in the earlier stages are being optimized. Nutrition and other revenue was $97.6 million, down 25% compared to Q4 of 2020 and down 9% compared to Q4 of 2019. As the pandemic recovery progressed throughout 2021, we've seen a return to more normalized drivers of demand to the subscription. Now, historically demand has been driven by both new digital acquisitions as well as new product launches. And looking to 2022 with a strong cadence of new releases, a focused and motivated coach network and a clear plan to more effectively bundle nutritional supplements which we believe will support improved performance over time. Turning to gross margin. Our gross profit was $97.6 million in the fourth quarter and this was significantly impacted by the negative gross margin in Connected Fitness as well as pandemic-related supply chain and shipping cost increases. Connected Fitness gross profit was negative $19.8 million, which included the impact of a year-end net realizable value charge of $10.1 million. This non-cash charge to cost of revenue was applied to our year-end inventory bike balance in accordance with GAAP and has been added back to net income in our calculation of adjusted EBITDA. Additionally, Q4 bike margin was pressured by approximately $3 million from higher COVID freight costs that persisted in an challenging supply chain environment. Now as we sell-through, the $80 million of bike inventory on hand we believe we'll will be well positioned to deliver positive gross margins on bike sales from a higher AUV and this cost normalize over time. Importantly, we continue to view the Connected Fitness business as an extremely valuable product, increased LTV through more retentive high margin subscription revenue, along with our unique ability to drive cross-sell of nutritional products directly on the tablet. Digital gross margin was 83.6% and declined 500 basis points versus 2020, primarily due to the higher content production costs, which were driven by the successful launch of BODi. Nutrition and other gross margin was 50.2%, a 360 basis point decline from 2020 with most of the change driven by incremental COVID-related shipping and freight costs. These shipping and freight cost are add-backs to our net income in our calculation of adjusted EBITDA. Turning to operating expenses. Excluding an impairment charge of approximately $95 million which I'll discuss in a moment our total operating expenses increased by approximately $11 million or 7% year-over-year. The year-over-year change was driven by one, higher operating expenses from the integration of mix and technology investments to support new program releases that power our customer acquisition, engagement and retention; and two, by higher public company G&A expenses including accounting legal and insurance costs. Moving on to impairment. As part of our annual balance sheet review and consolidation to the One Brand strategy, we review the goodwill and intangibles on our balance sheet. As the estimated fair value of goodwill and intangibles was less than the carrying value we recorded a noncash impairment charge of $94.9 million in the fourth quarter. This charge is also added back to net income in our calculation of adjusted EBITDA. Finally, our Q4 adjusted EBITDA loss was $26.6 million and our net loss was $146 million or negative $0.48 per basic and diluted share. Now turning on to the balance sheet. We ended the quarter with a cash balance of $107 million and no debt. This cash balance and a strong line of sight to a significantly improved 2022 EBITDA and lower CapEx profile than last year gives us confidence that we can effectively manage the business from cash flow from operations and access the capital markets as needed and we'll share more on that in future quarters. Before I turn to our outlook I'd like to provide an update on our views around demand. Our business looks very different today than it did two years ago at the outset of the pandemic. Since 2019, we've increased our digital subscriptions and our digital revenue by 50% and 46% respectively. And we've achieved these results by driving 220 basis points of higher engagement, 40 basis points of higher retention and a 61% increase in streams across our platform. We've also acquired a Connected Fitness company and with integrated systems processes and employees while making substantial investments in inventory. And as we look forward, we believe we've an incredibly strong product offering and continue to see significant opportunity in at-home fitness as consumers prioritize health and wellness and digital experiences become more embedded throughout the customers' lives. Now that said, we believe in the near-term, the environment will remain dynamic with variability in demand patterns, as we exit the pandemic and gain a clearer view on the new normal. That's why we're moving swiftly to consolidate our streaming platforms and human capital with a focus on profit maximization and cash flow generation across a variety of demand environment. With a business that's powered by digital fitness and nutrition subscriptions, we're well positioned to do this and to do it quickly. As a result of these actions, we expect to reduce our cash to use from operating activities by approximately $110 million in 2022 with immediate and significant improvements weighted towards the back half of the year. We'll achieve this through a series of focus actions. Specifically: one by generating operating efficiencies as a result of the One Brand strategy including a 10% reduction in headcount taken in January; two by reducing capital expenditure as we lap the Myx integration costs and the new platform investments in 2021 as well as a clear focus on in-year highest return opportunities; and three by optimizing our media spend as we focus on performance marketing opportunities that are highly accretive in near cash flow. In terms of the first quarter 2022, we expect total GAAP revenue of between $170 million to $180 million and keeping in mind that Q1 is our most challenging comparison quarter of the year, as we're lapping a 34% increase over Q1 of 2021, and an adjusted EBITDA loss of between $20 million to $25 million as most of the cost savings we expect to achieve through the One Brand strategy won't materialize until later in the year. Now in terms of our full year 2022 outlook, given the ongoing work with AlixPartners, we're not providing specific guidance on full year revenue or adjusted EBITDA at this time. That said, our belief in the total addressable market and Beachbody's unique product market fit of convenience, simplicity and exceptional quality gives us confidence that both the opportunity and our growth potential remains very strong. And with that, I'll hand the call back over to Carl.

Thanks, Sue. There is no doubt our industry is facing some near-term headwinds, as we move through the pandemic recovery. But in my 23 years of experience at Beachbody, I can tell you, we've seen challenging moments like this before and we've come out ahead every time. The total addressable market in fitness and nutrition remains significant and I firmly believe in the fundamentals of demand for our products within this category. We're moving quickly to align behind the strongest elements of our business and a return to profitability next year. As the company's largest stockholder, I'm confident in the long-term opportunity to drive sustainable, profitable growth and deliver on our mission to help millions more customers. With that operator, would you please open the call up for questions?

Certainly. [Operator Instructions] The first question is from the line of Jonathan Komp with Baird. You may proceed.

Yeah, hi, thank you. Maybe one clarification first, Sue, could I just go back and clarify? Are there shipping expenses that you're excluding from the adjusted EBITDA? I missed that. And does that carry-forward into 2022 on any piece of that?

We did add-back COVID-related shipping costs in general. And in Q4, a total of about $2.6 million and that related to incremental shipping on nutrition. We didn't add-back the incremental shipping on the bikes. And that was because we didn't have a basis for that in the previous year. It was higher than the pre-merger forecast we were given by the management team from Myx, but it wasn't something we experienced. So we wanted to highlight it in the script, but we didn't added-back in the reconciliation of net loss to adjusted EBITDA. The total overall COVID-related costs totaled $11.7 million for the 12 months ended December 31.

And then just on the forward projection, are you excluding some piece of the shipping or COVID-related costs going forward for 2022?

No. We don't have any adjustments in that adjusted EBITDA. I think the only thing that might occur ultimately would be add-backs associated with the reduction enforced.

Okay. Great. Thanks for clarifying. And then Carl, I want to ask more about the drivers of the shift in the One Brand strategy. I'm curious maybe a little more specifically what you see in the business in terms of the drivers and the reasons, and more importantly, the benefits or the impacts that we should see going forward from that move?

Yes. Thanks Jonathan. So, obviously, we were excited about Openfit and the prospect of casting a wider net to attract as much as the massive TAM available to health and fitness. But in this environment, it's a really difficult environment to allocate capital to two platforms much less on newer platforms. So it made much more sense for us to reduce redundancies, focus on marketing and technology and content into one brand particularly the Beachbody brand, which has better cost of acquisition efficiencies and much more mature and stronger lifetime value. So by bringing that all together frankly, we think that we're also treating all of the subscribers cumulative better because they get access to all this content that we've been developing over two decades. So strategically, we don't think we're sacrificing much particularly in this environment as opposed to the strengths that we pick up by really taking advantage of the flagship Beachbody brand.

Okay. Great. And just last one for me Sue on the balance sheet. I know you said we may hear more at a later date. But can you maybe comment on how long the current cash on the balance sheet with your current plans will be able to fund the business? I don't know if we can think about it in a number of months or quarters or any other context around that comment? Thank you.

Yes, sure. I mean, the fact that we've obviously got no debt at $107 million of cash at year-end, it's obviously a really strong starting position. And the other data point that we're looking at is budget projections for 2022 is really what gives us the confidence that we can service our working capital needs for at least the next 12 months without accessing the capital markets. So it doesn't mean we won't access the capital markets, it just means we don't need to. And part of the reason for that, of course, is we've got an incredibly strong inventory balance, and our ability to flex on CapEx and media in the year. So those are the big levers that are giving us that level of confidence.

Understood. Thank you.

Thank you Mr. Komp. There are no additional questions waiting at this time. I would like to pass the conference over -- back over to Carl Daikeler for any closing remarks.

No, I think we've pretty much covered it. I just appreciate everyone joining us today. I know you're busy, so we appreciate your interest in the Beachbody Company, and look forward to speaking with you again in the next few months. Take care everybody.

That concludes the Beachbody Company's fourth quarter and full year 2021 earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.