Gaia, Inc. (GAIA) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia Inc.'s financial results for the second quarter ended June 30, 2020. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell. [Operator Instructions]. 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 the 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, Kathy, and good afternoon, everyone. So our revenue for second quarter increased 23% to $16.2 million. We ended the quarter with 663,000 members, which is 59,000 above the first quarter. Our gross margin increased to 87.1% from 86.4% in the year ago quarter. We also achieved 39% improvement in our gross profit per employee to $436,000 from $314,000 a year ago. During the quarter, we generated a gain, not only the $1.9 million positive adjusted EBITDA, an improvement of $3.5 million, but also $1.9 million in cash flow from operation, which was $4.4 million improvement. Cash use in the quarter was $1.6 million, which was an operational improvement of $6.9 million. And we ended the quarter with $8.5 million in cash. We did achieve positive earnings for month of June, which is months earlier than planned, and we fully expect to reach our key milestone of positive earnings and free cash flow in July, as planned and communicated 18 months ago. With that, I will get Paul, talk to you more about the quarter results. Paul?

Revenues in the second quarter increased 23% to $16.2 million compared to the year ago quarter. Gross profit in the second quarter increased 24% to $14.1 million from $11.4 million in the year ago quarter, with an improvement in gross margins to 87.1% compared to 86.4% in the year ago quarter and also up from 86.9% in the first quarter of 2020. We ended the quarter with 663,400 members and we have continued to see increased interest in our unique and exclusive content library, which is evidenced by our Alexa global site rankings improving 37% from 8,375 in April of 2020 and to 5,317 in July of 2020. Selling and operating expenses, excluding marketing and member acquisition costs in the second quarter, were $6 million or 37% of revenues which is down from $6.7 million or 51% of revenues in the year ago quarter. Our focus on continued operating efficiency and expense rationalization over the last 18 months has been successful. Corporate and G&A expenses in the second quarter were $1.8 million or 12% of revenues, which includes a nonrecurring noncash charge of $715,000 related to the earn-out consideration we issued in June of 2020 tied to the success of the acquisition we completed in June of 2019. The acquired company maintained profitability since the acquisition, while exceeding the upper end of their member growth target. We have been very pleased with the integration of the acquired content library and member base into Gaia. The seller has also elected to convert $1.8 million in convertible notes that were due in January 2021 into Gaia shares in June of 2020. Total member acquisition costs were $8.4 million or 52% of revenues, down from 57% of revenues in the year ago quarter and in line with the 52% we spent in Q1 of 2020. We have continued to focus on increasing the volume of members we are adding via organic and nonpaid sources while also driving efficiency on our paid media channels. As a result, we were able to improve our average CPA for the quarter to $55, down from $68 in the first quarter and $77 in the year ago quarter. The annual planned take rate for new members has maintained in the 28% to 30% range, which has allowed us to recover almost 70% of our customer acquisition spend for each monthly cohort immediately upon conversion to them becoming paying members. Excluding the noncash charge previously mentioned, total operating expenses were $15.6 million or 96.4% of revenues, down from 119% of revenues in the year ago quarter. We have continued our trend of positive adjusted EBITDA margins and cash flows from operations for the third consecutive quarter with significant improvements on both measures from the year ago quarter. We also kept our cash utilization for the quarter, in line with the first quarter at $1.6 million, representing a significant improvement from the year ago quarter where we consumed $8.9 million, excluding the incremental borrowings from refinancing our building last year. This brings total cash used in the past 9 months down to $3.2 million from $17.4 million in the same period a year ago. With our current revenue levels and disciplined spend management, we have crossed the threshold for sustainable, internally funded growth. The transition to positive earnings in June, a month ahead of plan, and we're free cash flow positive in July as planned. We expect to be able to add 30,000 members in the third quarter while maintaining positive earnings and free cash flows. With that, I would like to open the call up for questions. Operator?

[Operator Instructions]. We will take our first question from Eric Wold with B. Riley.

A couple of questions. The first question, Paul, I kind of want to follow-up on the last question -- the comment you made about you're expecting to add 30,000 new subscribers in the third quarter while maintaining positive cash flow. I guess as you get to that threshold, you expect it to be sustainable. How do you plan on managing marketing spend in general from this point forward? Kind of what's the underlying goal? Is it to kind of grow as much as you can while kind of maintaining breakeven to slightly positive free cash flow or is there a certain growth rate you'd like to see? And then anything beyond that as kind of savings beyond that is back?

Yes. I'd say in the near term, and the reason we only provided 1/4 of visibility is it's a very dynamic situation as COVID and the related states are responding in different ways. So the plan is to really drive revenue growth at the 25% level while maintaining the positive earnings and free cash flows in Q3. And then obviously, wherever we end the quarter sets the new threshold for the next quarter. So that's the goal, though. It's to try and drive revenues 25% while maintaining profitability on the two measures that we talked about and then really being adaptive from there as the market continues to evolve.

Okay. Any noticeable kind of change in the dynamics of the subscribers you saw coming in during kind of the COVID pandemic and the initial state of it? I know you mentioned that the annual subscribers are kind of coming in at that 28% to 30% range. But any metrics you're seeing in terms of that may have this group be different in terms of maybe consumption, sustainability versus who may have been in the base part of that?

Yes. I think first and foremost, we've seen improvements across the board, not just with new members, but with existing members because they've had time to be able to dig into the library. And so we're seeing positive trends in terms of content consumption in multiple groups, which tends to lead to improved retention over time. As we look at the gross cohorts that came through starting in the second half of March, we've been paying very close attention to see how they're behaving as they continue to mature. And to be honest, we haven't seen really any degradation in terms of initial engagement during that 7-day trial period, and we've seen our trial conversion rates maintained over the period. So we'll see how the summer plays out. But we haven't seen really any degradation in terms of the quality of customer, even with the volume that we've been driving.

Yes. We have a little more focus. I think Paul posted not only supposed new ones but all -- they're like existing members to our series. I think our content actually is -- because that would've been produce last 2 years, you definitely drive the engagement and people -- kind of the original series are a big driver. Again, our original content is kind of about 80% of the VOD.

Okay. And then final question for me. Now that the contracts were renewed during the quarter with the two third-party distributors that were outstanding, has the higher monthly subscription price garnered in effect with all new subscriber -- all subscribers, both those in the third parties as well as your own? If that is the case, would the higher price go in effect?

So first of all, we don't control the pricing that our partners charge to their customers. We don't really have visibility into that. We only see what they pay us. And so we've started to be paid at the higher rates for all of them, but we don't have visibility into what they're charging their customers and what their plans around grandfathering or not grandfathering are. But we do know that the new price for our largest online partner has gone to match our current monthly pricing.

People like, online like Amazon, we can see people like Comcast, some mostly subscribe through Comcast. You don't -- we kind of see the change, plus we don't know if it's all or just a region, that's what Paul meant. So -- but generally, what we know, they're all paying us some high rate. And as we know, they change it. But the cable subscribers might not due to all the customers. So not at all, we don't know.

And then also one more quick one in there. I know it's a small number, but just kind of looking at the mid-June announcement you had. We expect to end the quarter around 655,000 and ended up 663,400. Any reason to that? Was that more subscribers coming in that month than you expected? Was it a lower churn rate than you expected? Anything that drove that specifically, something we should expect going forward?

Yes. So it was definitely the lower loss than we expected, particularly going into the renewal period for a lot of the acquired FMTV subscribers on annual plans in June. The second piece was that we just continued to see improvements in our cost to bring people in for trial and maintaining that conversion on them. So we expected that to start to pull back as things started opening up and the summer started getting into full swing in the U.S. But really, we were able to see pretty meaningful CPA efficiency through all of June, which we hadn't banked on.

Our next question comes from Darren Aftahi with ROTH Capital.

So can I follow-up on some of the questions that were asked? So I'm just kind of curious, dive a little bit deeper into the linearity of subs. Like when you did kind of a pre-announcement in early June, what is then kind of the cadence post that, how linear were the adds in the quarter and any kind of insight into trends in July? And then Paul, I think you've said, CPAs were pretty steady throughout the quarter. Just any kind of color you can give on trends into July? And how competitive kind of a market for the audience are going after has kind of changed from, say, April to late July?

Yes. So I'll refer back to what we talked about in late April when we originally talked about the growth that we were seeing in March and April. We spent pretty aggressively in April. So it was obviously heavily skewed to the number of subs that we added in April to allow us to get to the number that we provided on the April 27 call and then obviously, what we put out there on June 5. But what we saw was that even with the summer coming on and the economy opening back up, we were able to see cost per thousand, or CPM, on our paid media continue to maintain. So our dollars were able to go farther than we expected. But on the other side of that, I mentioned that Alexa site ranking. That helps pretty significantly with our paid search and other nonpaid channels into the second half of June. So we got a decent lift from that going into the second half of June that allowed us to get slightly ahead of where we expected to be. And I will say that all of those things have been continuing into July to date from a CPM and a CPA trend perspective.

Great. And then just following up on the profitability question. So 2 things, given that you said you're profitable a month early, you'd be free cash flow going forward. Is this -- should we think of this as kind of the trough quarter that being the third quarter to your cash balance? And then as we talk about targeting growing at a 25% top line level, as we extrapolate out a little bit further, I'm just kind of curious, how aggressive will you be in reinvesting the profits of the business. And I appreciate that you're kind of turning the corner here. But how aggressive do you kind of balance growth versus showing operating leverage in the model, if you will?

Yes. So I think to address the cash question first. The intent is to have this be the low point in terms of cash, as we've said going forward. But again, there's a lot of uncertainty as it relates to what the future looks like from an economy perspective. So I don't think anyone in our position would be prudent in saying that they have a crystal ball to say what it's going to look like. But our plans and where the business is at today allows us to operate as this being the low point of the cash. And it's really being funded with that 30% of annual take and being able to get 70% of our cash back immediately. That creates a pretty consistent source of funds for us to be able to keep growing. And then it's really just about moderating the amount that we're willing to invest in marketing initiatives in any period because that ultimately hits the expense side of the P&L. And so based on the trends that we're seeing today, we're pretty confident with our 25% growth target, and we'll see how that goes. Going into the second part of Q4 is really when we're going to start going on the annual renewals for our big push that started in October of 2019. So that's a little bit of an area that we're paying attention to because we're going to have a much higher volume of annual people renewing once we get over that. So early indications don't show any potential increase in drop off from those groups, but it will be something that we're paying attention to in Q4 as it relates to the cash balance.

And we started this 18 months ago pretty much. And so far, for all 18 months, as you know, some quarters being a little ahead or behind, but generally in 18 months, we kind of get here as expected. We have a little lift in the second Q4 COVID subscribers. But with that or without that, we would probably be at the profitability in June as we planned. And so we want to just stick to our guns and continue on the trend kind of regardless how -- obviously, it's our intention regardless how the economy and what's really happening because it's going very positive. So we don't want to really deviate from the trend that's working for us.

And last one for me. I know in the past, you've invested a lot in the translation engine. I'm just curious kind of on a run rate over the last 6 months, how much of your mix has come from international? And then are you going to get more aggressive in terms of investing in international, marketing in international? Is it going to be kind of status quo as you kind of go through the rest of the year?

Yes. So I think we talk about international in two components. One is non-English and then the other is U.S.-speaking, non-U.S. countries. We've seen a pretty healthy amount of growth, obviously, with the acquisition we did last June in Australia and New Zealand, where their member bases were at, but also in terms of the English-speaking European countries. But one of the things that we've done is we've actually made a pretty decent investment in our Spanish language programming. One of our shows Initiation, which is an original program. We also did a Spanish version of it, and that's been driving a decent amount of growth in our Spanish-speaking audience without us really focusing on our paid media activities there. So now that we've crossed the threshold and we can start to look at where is the next marginal dollar going to go to drive growth, we're evaluating what our non-English plans are for 2021 and what we want to allocate to that from a growth perspective. So I'd say, stay tuned. But organically, with the content, we're seeing increased demand and awareness of Gaia in Spanish-speaking countries. And we think we've figured out a playbook there, and we're going to then look at German and see what we can do there because that's a language that we already support and already have subscribers.

And just to put some numbers on that. So from like 3 years ago, we were about 29%, 30% international. We're talking direct right now, because pretty much all the third parties are U.S. And so they did that, say, 30% would be somewhere today about 37%. So let's say that we added like 20% on a mix base. And as Paul said, it's like it will continue to grow. But for right now, we have so much opportunity in the U.S., so we just kind of more -- let it be organic and slow without any specific push.

Next question, from Mark Argento with Lake Street Capital Markets.

Just a couple of quick ones. Content. Obviously, we think you guys are doing a nice job maintaining your -- managing content expense. Maybe talk a little bit about when you anticipate maybe being able to start firing up or doing some more live content or augmenting the catalog? And then also, I'm thinking about additional channels. One time, you were looking at adding additional pillars of channels to the platform. Any thoughts on kind of next leg of maybe subscriber growth coming from either some acquisition or organic channel development?

So there are several questions there. So the content, as I said, we kind of focus on our series more. Also, we're going to be focusing the content when we didn't have international rights. So that's kind of hopefully finishing over next year. So we have the international rights to virtually all of our content or at least the plan. We're spending pretty even pace. We don't really slowed down. We have a little bit on beginning of the second quarter, but it just lasted about a month. So we got to actually film a little more in the case. Their traveling gets shut down something, so we have some buffer. But generally, as an average, we want to keep it kind of firm to stay where it is.

The live event.

The live events, we still -- that's still pretty much sharp. We cannot have really have -- by the police, local laws to have the gathering of any size. So we didn't do any live content since we started. So that's still kind of there. We'll see how -- and it will continue. We definitely have plans, but we also -- we need to see how this is going. So we don't really, at this point, we're not really doing anything this month.

I will say on the live access premium level subscription, even if we don't have events, we are still seeing organic interest coming in every day taking that $299 annual plan to get access to that content. So once we can get the events going again, we have a slate of really high-end presenters that are ready to come in. So it's just deferred, I would think at this point. But with the growth in our direct subscription business and the organic growth in that live access premium, we're on trend for where we expect it to be from a revenue perspective, even with having events.

And then in terms of last part of that was the -- any additional channels or thoughts of expanding the platform or looking at an additional potential M&A to augment the portfolio?

We don't really want to do something right now because things are kind of doing well. I think it's for us to add more series to some of the newer channels, like Alternative Healing. Obviously, we get a big -- we'll have a lift from the acquisition of FMTV. But obviously, we did plan that when we kind of launched that channel. But we definitely would like to see at least through end of the year before we think about doing another one. Plus right now, it's all general numbers kind of going in the right direction especially, as Paul mentioned, there's more attention. So I think we would kind of plan to kind of continue as we are really through the end of the year.

[Operator Instructions]. Well take our next question from Peter Rabover with Artko Capital.

Guys, congratulations with your milestone. So that part [indiscernible] to try to come out in a little different way. You guys announced a big strategic shift 18 months ago or a little more and you hit your goal pretty dead on, and you also pointed out, just some fluctuations within quarterly results, but the trend was there. And so I guess now that we've reached this point, which is almost anticlimactic, but what do you think like your next big milestones or goals to work towards? And I don't want to commit to turning numbers, but certainly something to -- I'm sure the market is wondering.

I think we would have, for right now, we're going to kind of see by end of the year how the market is going because it is uncertainly going back and forth between can we film, can people travel. So we don't want to really put really big things out there. For us, it's really kind of continue, honestly, our desires to continue with positive earnings and free cash flow and keep growing the 25% and see how this year go. I wouldn't, with all these economy jitter going on, to go and say something beyond that because I don't think it will be prudent in this kind of market.

But I will say the reason itself, a little bit anticlimactic is because our approach has been slow and steady improvement on all of the things that we pay attention to. And I think that will be our philosophy going forward. We obviously aren't comfortable providing any forward-looking guidance at this point. But that's the methodology and mindset that has really been ingrained in our employee base over the last 18 months, and we plan on continuing that going forward.

Okay. No, that's great. Maybe a question I wanted to ask, though, other people have asked this. How do you guys think about your cash? And I know -- excluding the uncertainty of this year or, I guess, the next like 6 months. But given that you will be free cash flow positive, you guys have kind of a board-level capital allocation methodology. How do you think about it? I'll leave it there.

We don't really, at this point, as Paul mentioned, that obviously, trying cash flow positive, we shouldn't really did below where we had or at least not meaningfully. But we plan to actually start to build the cash. And I think the first -- the question would be used to the cash, we probably pay out some -- we have a mortgage on the headquarters. So that would be the first probably use, if we had.

Okay. And then I guess, maybe a final bigger question. But what's your view, I guess, in video streaming service industry in general and where do you think Gaia sits into it? Does it make sense for it to be a stand-alone channel or be part of a bigger media group or maybe you guys become a bigger media group? Your thoughts on the industry would be great.

We don't really want to speculate on this one. There's no time to even comment on it.

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.

Well, thank you everyone for joining, and we look forward to speaking with you when we report our third quarter, which will be in November 9, and we expect for the first time, obviously, to be with positive earnings and free cash flow, so hopefully. Talk to you then. Thank you.

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