Gaia, Inc. (GAIA) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia Incorporated's financial results for the third quarter ended September 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 preference, 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. And good afternoon, everyone. So, revenue for third quarter increased 28% to $17.5 million. We ended the quarter with 697,000 members, which is 34,000 above those last quarter and 4,000 above the plan. Gross margin increased to 87.1% from 86.8%. We achieved 46% improvement in gross profit per employee. It's a measurement that we look for a couple years now. Gross profit per employee increased first time over 0.5 million ending for the quarter at $513,000, up from $351,000 a year ago. We did not experience any meaningful slowdown in our content creation, which is becoming our main asset and differentiator. Content we created represents about 80% our member viewing. This remaining 20% comes from licensed titles. Net income for the quarter was $200,000 or $0.01 a share, which improved significantly from a loss of $4.1 million or $0.23 loss per share in a year ago. The actual GAAP income for the quarter was $6.3 million or $0.33 per share, which included $6.1 million gain on the sale of half of corporate campus excluding our studios. EBITDA improved $4.8 million to $3.4 million compared to a loss of $1.4 million in the year-ago quarter and increased $2.6 million sequentially. For the nine months, we generated $7.2 million in cash from operation compared to a cash use of $5.9 million in the year ago, which is a sizable improvement of $13.1 million. Our cash balance for the first time actually increased by $0.3 million, which compares to a decrease of $5.8 million year-ago quarter. We ended with cash up to $8.7 million, same time as we reduced our outstanding debt to $4 million, down from $17 million. We achieved all targets as planned and communicated 18 months ago and we expect the fourth quarter to be another one with positive earnings and free cash flow and another 30,000 member jump in our base. Paul will now speak to you more about results. Go ahead, Paul.

Thank you. Revenues in the third quarter increased 28% to $17.5 million, with an increase in gross profit of 29% to $15.3 million. Gross margins also improved to 87.1% compared to 86.8% in the year-ago quarter. As Jirka mentioned, we ended the quarter with 697,300 members, which represents net growth of 33,900 members for the quarter and net growth of over 117,000 member for the 12 months ended 09/30/2020. The net growth for the quarter was ahead of our expectations, due primarily to improvements in retention. Selling and operating expenses, excluding marketing and member acquisition costs, in the third quarter were $6.3 million or 36% of revenues, which is down from $.6 million or 55% of revenues in the year-ago quarter. Corporate and G&A expenses in the third quarter were flat at $1.4 million, which is in line with the prior-year quarter. Total member acquisition costs were $7.2 million or 41% of revenues for the quarter. This is down from 49% of revenues in the year-ago quarter and down from the 52% that we had in the first half of 2020. Beginning in mid-August and continuing through October, the cost of online advertising was extremely volatile. Despite this volatility, our efforts to improve the efficacy of our advertising efforts over the past 24 months paid off and we were able to keep CPA flat with the prior-year quarter at $60. The annual plan take rate for new members has continued to be in the 28% to 30% range, which allows us to benefit from the negative working capital of our model. EBITDA improved to $3.4 million in the quarter from $0.8 million in the second quarter and a negative $1.4 million in the year-ago quarter. The sequential improvement in EBITDA is approximately 2x the growth in gross profit, which demonstrates the operating leverage of our direct-to-consumer subscription video on demand model, now that we have reached scale. We also improved our cash flow from operations to $3.3 million from a cash use of $0.7 million in the year-ago quarter. As Jirka mentioned, we sold a portion of our corporate campus to a real estate investor for $13.1 million, utilizing the net proceeds to reduce our debt from $17 million to $4 million. The corresponding reduction in interest expense will offset the decrease in building income, so the net impact on operating expenses and cash flows will be neutral going forward. Including the gain on the sale of the real estate, we generated net income of $0.2 million or $0.01 per share. And on a GAAP basis, net income for the quarter was $6.3 million or $0.33 per share, which includes the gain on the sale of real estate. We also generated $0.3 million in cash during the quarter compared to cash used of $5.8 million in the year-ago quarter. The quarter marks the final milestones in our transition to generating positive earnings and cash flow, while maintaining the revenue growth rate above 20%. As I mentioned earlier, the online advertising market has remained very volatile to start the fourth quarter. In spite of these potential headwinds, we're still targeting net member additions of 30,000 for the fourth quarter, while maintaining positive earnings and cash flows. With that, I'd like to open up the call for questions.

[Operator Instructions]. We'll take our first question from John Godin with Lake Street Capital Markets.

First for me on the annual subscription plan, what do you think are some of the key drivers that allow you to uphold that 20% to 30% mix? And has this started to translate into an increase in retention and higher lifetime value so far?

The biggest shift is in what we did back in Q4 of last year when we actually put the trial period on both the monthly and the annual plan. That's what drove the biggest move in that direction. And as we've continued to tweak and optimize our cart and checkout flow, we've added some things to help highlight the value of the annual plan. And I believe that's really the primary factor of it, is the people that believe that they're committed to Gaia can look at it from a financial perspective and see the value that they get versus the monthly membership. And of course, it is improving retention because we only need to look at once a year renewals versus 12 monthly renewals for the same group of people. versus 12 monthly renewals for the same group of people. But it is a direct drag on ARPU, obviously.

Next, can you provide any additional color on how engagement has been trending? Has this kind of remained elevated over the past several quarters? What is kind of your outlook and strategy to keep it strong moving forward?

So, the question was around engagement. That was what you're looking at?

Correct.

It was kind of interesting with COVID, obviously. So, we have the engagement in a March/April start to really come up. But as the year goes through, it just kind of get to the levels when it was before. So, the COVID impact was pretty clear in the chart. They had some good practices and start to increase engagement of new members. And it's still for next probably nine months, it's our main focus to improve the first especially 90 days engagements. So, we kind of look at stuff – we kind of look at – if there's certain time of dormancy and stuff, so there's a list of several, if you look. But I think key factor is improving currently engagement.

And then, last one from me, could you talk about maybe some of the trends you're seeing in your customer acquisition spend? I know the advertising market has been volatile, but where are you really seeing the most success from customer acquisition came from?

To be honest with you, John, it has been across the board. We've seen all of our channels continue to pay off. The one thing that we've talked about historically has been the organic traffic and the improvements that we're seeing from that, particularly as it relates to YouTube and the momentum we can drive from users looking for information on YouTube and then it tracking back to Gaia. I'd say the paid search has continued to overperform for us. Historically, that wasn't really a major driver of volume. But starting in April, with the uptick that we saw in demand for streaming services, that's paid off for us as we've continued through the summer. So, even if the paid media on social has been extremely volatile, there's other pieces that we've been able to lean on that has helped us keep that CPA in line with the prior year, even with higher volume.

We'll take our next question from Steven Frankel with Colliers.

How large of a bolus of annual subs do you have coming up for renewal in Q4?

If you remember from last year, we switched over in mid-October. So, October is lighter than November and December, but it's not a meaningful jump in terms of the volume of activity from our normal monthly plans. We're not going to provide a specific number, but I will say that it will start to roll in in November, and then it'll normalize on itself somewhere around February from the rate change compared to last year.

And also, October was pretty challenging marketing because the election till now. So, October was expensive. But even with that, we still say we're planning to do same amount, the subscribers, like we did previous – the 30,000 as we planned for third, we're still planning for fourth. So, obviously, that's kind of answered your question.

I think there's a good chance in the next 12 months that you can drive up that take rate of annual subscriptions materially from where it is today? Or do you think that's kind of what the market will bear at the current pricing structure?

I think that last part that you just introduced is where I was going to go with that. With the current pricing structure, I think maintaining that rate is what we've been looking at. Obviously, we could do some things with pricing if we wanted to drive more people to annual, but we don't have any plans to do that at this time.

And what are your prospects for maybe raising prices over the next 12 to 24 months? Where do you think your price is now relative to the competition?

Well, I think Netflix did what they always do for us, opens the door from the consumers' mind that there is price opportunity for us. It's something that we've been looking at strategically to get back to that first question around how do we potentially drive more people to annuals, knowing that it helps with cash and with retention overall. But we don't have any plans, as I said, to do it at this point in time. But within 24 months, it's something that we could definitely be looking at, especially as others in the space start to adjust to what Netflix just did.

And it can happen sooner. Depends on other moves. There are still entries in the market. And so, from like Disney and now other entrants. You kind of want to know where they come because they typically come on higher, but Netflix, Disney was opposite. So, it's kind of more kind of set foot right now than this market will go, but there is obviously a rule. So, we can still – if you take the segments, our yoga competitors are like $16 to $20 a month. So, there's a lot of room there, while they don't have as good offering. But for now, I would say maybe really focused. And if you notice, we did decrease our expenses in absolute dollars, about 6%. So, I'll actually – expenses in dollars, not as a percentage, decreased 6%, while revenue grew 28%. So, there was more focus on that direction. That's why you see the CPA per employee also increasing 46%. And there's place in the room how we play these games. And there's other things, for example, like, we want to decrease the percentage from Facebook and stuff like that. So, I would say, we will start to – let's put it this way, there is no plan to change prices in 2021. I think I would end it with that.

And then, one last one, what's going on with your international member contingent? And what's the plan in 2021 to maybe try to improve that mix?

That's a part of what we focused on to get to where we are with this quarter, was reducing as much as possible the things that were inefficient and driving near-term revenue. And one of the things that got deprioritized in that was the expansion of French and German. Spanish has been growing nicely on its own. And so, we're looking at 2021 actually taking some of the space that we've created in the expenses and looking to reinvest that back into growing Spanish, French and German. So, I would say it's going to be more of a focus for us going into 2021 and beyond because we do believe, long term, we think we can be two-thirds international versus where we are today.

And where are you today?

About one-third.

Yeah, about one-third.

We'll take our next question for Darren Aftahi with ROTH Capital Partners.

This is Dillon on for Darren. First one, could you talk about some of your content production plans, if you have any for 2021? I know you said – you mentioned no meaningful slowdown in content creation. So, I guess how comfortable are you with your current library and just sort of what's your outlook there?

Well, we actually already, like October, we're done shooting with all the things for this year, just in the case, it would be in a lockdown. So, we already have pretty much everything for this year filmed. We keep increasing our budgets and there's a lot of new shows what's going to show up next year. We didn't find any issues with filming for the series. Where we had a problem and we still do is the Gaia sphere live event. Maybe Paul can talk.

Yes. Just finishing up Jirka's thought on the overall content mix, we are continuing our successful shows with another slates of seasons, plus we have some shows that are in development that we're internally really excited about. And those should be coming out in 2021 and beyond. As Jirka did mention, though, the live access with our current rules in Boulder County where our headquarters are at were pretty limited in the amount of people that we can have in our studio audience, which is making us evaluate what does that look like going forward for the first part of 2021 in terms of the events that we have scheduled and what does that do for our content mix as it relates to those $299 a year premium members. So, we are looking at it strategically to think about how do we give them content, but we are acknowledging the state that we're in right now, which is people might be apprehensive to travel and we're limited by how many people we can have in the States. So, the upside from is going to be limited in the beginning of 2021.

And it's more the ticket sales and stuff because there's a way to produce new content on the front level for the subscribers, but the ticket revenues, which we didn't really have anything in 2020, we don't really plan any meaningful 2021 as well, which does hurt, but we clearly made up by that by increased subscription comparable to what you have in plan.

As a follow-up, was there anything in particular sort of with the adds you've seen in 2Q and 3Q sort of during that COVID environment that have been any different from your past cohorts in terms of, I guess, like viewing habits?

I think the biggest thing that we saw was the fact that people were – pardon the word – captive after they signed up. So, they were engaging with the service more meaningfully in their early tenure, which helps drive overall engagement and retention. And so, that's really what the key part of this period of time was, is we've historically always had people interested in signing up, but then life happens after they sign up and their onboarding might not go as well as they initially planned because they get busy. We didn't have that issue in March, April and May and we took some learnings from that period of time to reorient how we do our seven-day trial onboarding to increase engagement overall. So, definitely, got some benefit from the pandemic that we've applied some learnings to try and drive forward. But I think that's the biggest piece, just the amount of engagement in early tenure.

I'd, overall, the content, we didn't – compared to a lot of other people especially in the Hollywood side kind of stinks when they have a problem with filming and constant talent selection. We don't face that at all. Since it's very different topics, we didn't feel any cost increase or none of that. So, from the content creation was kind of – short of it, it's sometimes challenged in a rebook because the flight gets canceled, the people don't want to do this time. But we figure around, so we don't really have any meaningful content challenges like everybody else. And I think will be really important for us as we go forward to kind of see that very unique content.

Last one for me, I know you mentioned YouTube being a strong channel for organic traffic. Can you talk a little bit about your ambassador program and sort of the referral end of it from more of your, I guess, more legacy customers?

We've talked about that on prior calls. It's definitely something that we've been continuing to build on. I think one of the challenges coming into the election was how aggressive YouTube was in demonetizing and defocusing on some of the talent ambassadors that might be in our space. So, we definitely have a little bit of headwind from that in the second part of Q3. But, overall, the program continues to build on itself. We're obviously having to react to some of the changes that YouTube is doing as it relates to our partners on air. But overall, the demand for our type of content is only increasing. And we're trying to make sure that we can stay on platform with YouTube and our partners, and so we've been mindful about what type of content we put out there. But overall, it's driving a lot of traffic back to Gaia from highly engaged users that are finding our content and then going deeper once they get to Gaia.

[Operator Instructions]. We'll take our next question from Eric Wold with B. Riley Securities.

Just a couple of questions. One follow-up to, I think, some of your comments you made, Paul, around the advertising market being volatile recently. How much of that was the election itself? And was there anything else kind of below the surface of that that would cause this volatility to continue or some of these headwinds to continue past the election?

The election was definitely felt both in terms of the amount of impressions that were being sucked up, but also in terms of the grooming that the platforms were doing around the potential opportunities for us to advertise. So, we had a definite headwind there. But I think a bigger part of it was that as more and more of the domestic economy started to come online, there was a lot more advertisers in the mix than we would normally see at that time of year. And I think that is a testament to some of these bigger advertisers not having a lot of means to be able to spend their marketing budgets and starting to get into digital in a way that they haven't historically been. I will say that we're seeing it dissipate a little bit with this week, now that the election is behind us. So, hard to say which is election versus which is just brand advertisers. But in summary, I would say it was more demand for less impressions which caused the price to go up.

Looking forward to next year, not necessarily looking for specific guidance on next year, but I think about kind of the run rate you're currently on now, $3.4 million of EBITDA in this last quarter even with some headwinds, the decent visibility you've got from the annual subscriber base, as you move forward over the next 12, 18 months, how much of this cash flow positive EBITDA do you want or need to reinvest in the business to sustain this level of growth or grow faster versus – harvest is not the right word, but kind of see EBITDA growth from these levels?

That's a dynamic environment in terms of our ability to spend money and drive growth. I'd say that our primary focus is continuing to drive revenue growth over 20%. And we want to make sure that we're not haircutting current period investment that we have to catch up for in future periods. So, it'll be a balancing act. We're going to continue to evaluate how Q4 shapes up and be able to provide a bit better guidance in terms of what we think that looks like for 2021. But the primary focus is to keep revenue above 20% growth, not just for 2021, but past that as well. And that's what we're continuing to optimize for.

I think it's really a key part, how much a year is spent on marketing. And our plan is pretty much all the line, all the operating lines, to keep dropping, except content. We want to keep stable as a percentage of revenue. But generally, like any business, you run to grow fast and you keep increasing your bottom line, that would be kind of a generous for every business.

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

Thank you, Anne. And thanks to everyone for joining. And we look forward to speaking with you when we will report our fourth quarter in February. And as I said, we expect to be another quarter with positive earnings and free cash flow. Thank you very much.

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