Beachbody Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 7 speakers on the call.

Operator

Afternoon, ladies and gentlemen. Welcome to the Beachbody Company Third Quarter Earnings Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions.

Operator

I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to your host, Bruce Williams, Managing Director of ICR Investor Relations. Please go ahead.

Speaker 1

Welcome, everyone, and Thank you for joining us for our Q3 earnings call. With me on the call today are Mark Goldston, Executive Chairman of The Beachbody Company Karl Deichler, Co Founder and Chief Executive Officer and Mark Sweetan, Chief Financial Officer. Following the prepared remarks, we will 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.

Speaker 1

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 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 Mark Goldstein. Mark?

Speaker 2

Hello, good afternoon. Thank you for joining us today. I'm thrilled to be part of this exciting journey and to contribute my extensive experience to the company's success. I want to make 3 key points that are really important for investors and analysts to gain a perspective on where we are and where we're going. First, as you know, we intend to execute a reverse stock split later this month.

Speaker 2

This should get this stock into a range that will attract institutional investors. 2nd and critically, we must lower the breakeven of the company. We previously have taken out $125,000,000 of costs And Mark Sweden, our CFO, will talk about an additional $40,000,000 that we've identified in cost savings. We expect to realize these additional savings in 2023, bringing the total to $165,000,000 in aggregate annualized cost savings since 2021. And 3rd, we have begun the implementation of the turnaround plan we architected after my arrival in June of 2023.

Speaker 2

As part of that plan, we'll be aggressively pursuing ways to win back some of the 14,000,000 people in our extremely valuable CRM based who are either former subscribers or qualified leads that were added to our database since 2016. In addition, we fortified the product offering for our direct sales organization with the addition of Growth Day. This was developed by the dynamic, World renowned Brendan Burchard that we're aggressively pursuing outside partnerships and additional direct to consumer channels to help diversify our beta and create additional revenue streams from those untapped channels. Last quarter, I told investors that our main focus As a result of the $165,000,000 in expected cost savings, along with the key elements of the turnaround plan I just spoke about, We believe there's a clear path to becoming cash flow positive, which would indeed be a milestone for the turnaround effort in Body. Foddy possesses invaluable assets, including what we believe to be the world's most extensive digital fitness library, a valuable range of nutritional products, a massive database of current and past customers and importantly, a highly skilled leadership team.

Speaker 2

Last quarter, we developed a plan that prioritized profitable revenue over growth at all costs and a drastically reduced time frame for return on invested capital. If you look at the P and L of the company, you can see that scale is really not our primary concern. We believe we've got the girth and the scale to be profitable in the revised cost structure that we've created and the potential for generating operating leverage during the course of 2024 exists largely as a result of those major cost savings initiatives. I've now been here for 5 months, and I am more convinced than ever that we've got the products, the team, the total adjustable market size, or TAM, and the turnaround plan to return Body to its position as a dominant, highly profitable company, but one that is architected in a much more As I stated on last quarter's earnings call, turnarounds are not linear and there will definitely be some bumps in the road, But our turnaround plan has been meticulously crafted, and we're making good progress. In the coming months, You should expect to see additional positive and purposeful changes taking place in the company.

Speaker 2

Our products are world class, And I believe this because I'm a fitness enthusiast and I've got significant experience in this athletic space with leading companies like Reebok, LA Gear, Converse and Athletic Propulsion Labs or APL. This is my wheelhouse. Now that we're in the process of focusing on improving the balance sheet and implementing strategies to expand our sales and marketing ecosystem, I firmly believe that we're on our way to driving more profitable revenues and importantly, Building cash. I'm focused on helping the team optimize our LTV to CAC through additional monetization opportunities that will drive cash to profitability. We have significant opportunities in front of us, and we're just getting started.

Speaker 2

You'll note that on our Investor Relations presentation on our website, we expect our selling and marketing costs as a percentage of revenue to decline 1,000 basis points to 45% during 2024. Just take a moment to reflect on this change. This 1,000 basis point reduction should result in an additional 10% of revenue flowing through to the bottom line in 2024. That's a game changer, and it's going to be critical in helping us to be cash flow positive in the future. I'd now like to turn the mic over to Carl, We'll give you more insight into the company's transformation.

Speaker 2

Carl?

Speaker 3

Thank you so much, Mark. And let me start by saying how great it is to work with Mark as Executive have the benefit of his experience turning around public companies and strategizing how we can unlock the value we've created over the last 25 years, which Maybe we've taken the underlying value of the business for granted

Speaker 1

a little bit and it's such a

Speaker 3

great partnership to work with Mark. Okay. So let's talk about the Q3. First, a high level overview of results and operational highlights. Then Mark Swedin, our Chief Financial Officer, We'll give additional detail on Q3 financial results and guidance for Q4.

Speaker 3

We've made significant progress Implementing our turnaround plan this quarter where our primary focus is on cash flow generation and creating new incremental revenue opportunities. Q3 revenues and adjusted EBITDA were within our guidance range. And while our overall digital subscriber count decreased by 10% sequentially to $1,380,000 in Q3. As we mentioned last quarter, the more meaningful metric Is our premium digital subscription BODI, spelled BODI, which grew by 27% in Q3 over Q2 To exceed 900,000 subscribers at the end of Q3. And you've no doubt heard of the emergence of GLP-one weight loss drugs, which have generated a considerable amount of attention and even questions to their effect on demand for services like ours.

Speaker 3

We're actually encouraged about treatment that can help some of the 74% of Americans that are overweight or obese. But we also recognize That a chemical solution is only a single step towards sustaining a healthy lifestyle and does nothing to improve skeletal muscle mass, which is Critical to health and functioning in the world, it's really vital that people supplement these weight loss drugs with healthier lifestyle choices, including fitness and nutrition. That's where we come in. Vai's approach to health esteem helps people feel good as they create sustainable healthy habits. Honestly, the significant investment people can make in a pharmaceutical solution is wasted without lifestyle change.

Speaker 3

And we have the lifestyle solutions for GLP-one users, including a broad array of structured, step by step fitness and nutrition programs, plus personal development and mindset tools. As a result, we don't see GLP-one treatment as a headwind for us, but rather a very significant tailwind as it brings the importance of reducing obesity to the forefront and makes lifestyle change an important component of that decision. That's just another reason that we're excited about how our position in the market puts us in a unique position to Capitalize on these long term industry tailwinds and our turnaround plan aligns with responding to these tailwinds. When we started this turnaround, there were 3 key pillars to our transformation. First, we had to massively re architect our cost structure.

Speaker 3

By end of 2023, we expect to realize $165,000,000 in annual cost savings, and we continue to carefully scrutinize capital allocation To make the company as cost efficient as possible, second, we initiated a reinvention and simplification of our digital platform, which was completed earlier this year. Since the introduction of our premium digital platform, subscribers continue to renew from the former Beachbody On Demand subscription to the new Bodies subscription at a 60% rate, which exceeds our original expectations. 3rd, We need to restructure sales and marketing with a focus on delivering higher cash generating revenues and lowering customer acquisition costs. So let's use this call to detail our progress on that 3rd pillar. Overall, there are 5 key initiatives that we're executing against, which we believe will drive new memberships and generate profitable revenues.

Speaker 3

1st, partner network activation. Restoring momentum to our coach and partner network is a central initiative to our turnaround plan, as our partner network our largest and most effective go to market strategy. The initiative we call the Body Growth Game Plan is designed to help partners Improve the overall productivity of their teams as they help current and potential customers achieve an improvement in their health esteem. Health esteem is the category of the industry which shifts the focus from a results at all costs mentality to that of feeling good at every step of the process to achieving an extraordinary lifestyle transformation, and that includes adding positive mindset and high performance habits to the equation. To that end, we're excited by the appointment of New York Times Best Selling Author and Motivational Speaker, Brendan Burchard, to the role of Chief Growth and Performance Advisor.

Speaker 3

Brendan is famous for being one of the world's leading high performance coaches, And he's assisting the company's partner network in achieving optimal performance so more people unlock the potential of this supplemental income opportunity for themselves. Our relationship with Brendan is built around a revenue sharing partnership to incorporate Brendan's Growth Day app into our product offering. That's an additional new revenue opportunity for the company and our partners, and that kicks off in just a few days on November 9. In addition, we recently announced that early next year, we are implementing new results oriented compensation incentives for our partners, which will reward high performance, especially for new partners, while aligning the overall compensation structure with generating profitable revenues. 2nd, customer database reactivation.

Speaker 3

We've begun aggressively mining our customer database of over 14,000,000 prospect email addresses. We started testing our broader database mining campaign in August with special offers. And while it's still early in the process, The opportunity to activate this massive database with minimal reactivation costs can have significant upside. We'll continue to refine and expand this initiative and update you on our progress in the upcoming quarters. 3rd, performance marketing.

Speaker 3

We've been deploying more efficient direct marketing tactics that are producing stronger results. For instance, we've optimized our media placement, resulting in a 25% increase in our conversion ratio in Q3 over Q2, bringing us to 2.5%, which is the industry norm. Also, this quarter, we launched affiliate distribution with Rakuten and Cartera, offering consumers new opportunities to earn rewards when they shop with us. And we launched our Refer A Friend pilot, enabling us to give incentives to those that refer friends to subscribe to Bodies. 4th, our free preview tier.

Speaker 3

Last quarter, we announced our plan to introduce a new free preview tier to give prospects Better visibility to the superior experience of structured programs, which leads the user to a step by step process to get real healthy results. This tier will let people try over 120 samples of our structured fitness programs and nutrition plans, plus our personal development content and see the real distinction of our approach to lifestyle transformation. That content has been locked behind the paywall until now, which you can imagine has been an impediment to converting new prospects into subscribers. The launch of body previews is scheduled for mid November. And let me elaborate on how significant this opportunity is.

Speaker 3

Like I said, currently, we're converting 2.5% of our visitors into paying drivers, which is an industry standard. But with our popular content like P90X, Insanity, 21 Day Fix and over 120 programs, We believe the free preview model, including a version which will attract traffic on YouTube, gives us an opportunity to showcase our most powerful asset, Our structured content and introduce more people to our proven approach. We believe this new tier will drive a higher conversion rate of visitors to paying subscribers, while attracting even more prospects to our platform. And 5th, Amazon. We're excited to expand our presence on Amazon.

Speaker 3

Although body products have been previously sold on Amazon, we've never treated the platform as a real sales channel for us. By partnering with One of the largest Amazon resellers will broaden our nutrition and fitness offerings and we expect to capture the latent demand of significant search volume for our brands On Amazon, as well as optimizing our product listings on the platform.

Speaker 1

This is

Speaker 3

just getting started as we go into the Q4. So we'll provide updates on future earnings calls. All this is to demonstrate that we are laser focused on generating profitable revenues And expanding the visibility of our 25 years of content to this massive TAM, which has maybe only heard of P9Dx. As proud as we are being one of the few health and fitness companies to achieve this kind of critical mass over our 25 years, I'm actually more enthusiastic about our potential over the next 25 years with all these new initiatives. But for now, Let me turn the call over to Mark to walk through the specifics of our Q3 financials.

Speaker 3

Mark?

Speaker 4

Thank you, Karl and Mark, and good afternoon, everybody. I am pleased to announce that in the Q3, we met our guidance on revenue, adjusted EBITDA and cash used in operations. This is the 8th consecutive quarter that we have achieved or exceeded our guidance. I will now discuss our results for the 3rd quarter Along with our KPIs, we then provide guidance for the Q4. Revenues were $128,300,000 which was above the midpoint of guidance and 5% below the prior quarter.

Speaker 4

The year over year decline in quarterly revenue was 23%, down from 25% in Q2 and 27% in Q1. The Q3 sequential revenue change reflects the normal I will elaborate on each of our 3 product lines and given all the changes in the past year, I will focus my comments on sequential revenue performance. Digital revenue was $64,300,000 down 1% from 65,200,000 in Q2. Our overall digital subscriber count is 1,400,000, down 10% from $1,500,000 in the 2nd quarter. Given the $179 annual price of the body subscription, the ARPU is now higher And our stable quarter over quarter digital revenue was also supported by our partner count, which remained flat over Q2.

Speaker 4

A reminder that we have tens of thousands of partners selling our products. Nutrition revenue was $59,000,000 down 9% from $64,600,000 in the prior quarter. Our nutrition subscriber file size is 177,000, down 10% from $196,000 in the prior quarter. In Q3, we launched a new monthly digital nutrition bundle Call the $99 rebel at a competitive introductory price. This bundle offers strong value and we believe will resonate with consumers in macroinflationary environment without sacrificing profitability.

Speaker 4

We believe this new bundle and the broadening of our sales distribution channel We'll stand the decline in Nutrition. Connected Fitness revenue was $4,900,000 down 3% from $5,100,000 in Q2. We delivered 6,500 bikes versus 5,500 bikes in the prior quarter, an 18% increase. We continue to see bike sales as a valuable lever to drive higher LTV across our subscriber base as bike customers show more engagement and lower churn. The higher Bite volume is driven by promotion.

Speaker 4

Moving to gross margin. We achieved a gross margin of 58.5% for the quarter, which decreased 460 basis points from the same period last year and 280 basis points below the prior quarter. Digital gross margin was 74.5 percent for the quarter, which is 3 20 basis points less than the same period last year. Compared to the prior quarter, Digital gross margin decreased 50 basis points. The lower gross margin is due to sales deleverage.

Speaker 4

Nutrition gross margin was 54.7 percent for the quarter, which is a 50 basis points decrease from the same period last year. Compared to the prior quarter, Nutrition gross margin decreased 3 20 basis points due to increasing cost of raw materials and a product mix shift. Connected Fitness gross margin was minus 105% for the quarter versus minus 42% a year ago. And compared to the prior quarter, Connected Fitness gross margin declined 35% this month. The margin difference is driven by bike promotions and accounting charges for inventory reserve.

Speaker 4

We have significantly reduced our bike inventory and are launching a new offer in December out of our existing inventory. The new offer will appeal to price conscious consumers. They won't have the large screen, but will connect to iPhones and Apple Watches. Our strategy continues to be focused on selling bikes to generate cash and attract long term customers with higher lifetime value. Next, our operating expenses were $104,000,000 representing a $37,000,000 reduction from the same period last year, which is a 26% improvement.

Speaker 4

Cost reduction is a key pillar in our transformation, and we continue to evaluate our cost structure on an ongoing basis. From a fixed cost standpoint, which includes our overhead expenses and capitalized expenditures, we took out $125,000,000 in 2022 and are on track to take on an additional $40,000,000 in 2023 for a total of $165,000,000 As we have stated, our cost structure is primed for significant operating leverage. Now let me walk through our 3 OpEx lines. Selling and marketing was 53.9 percent of revenue compared to 56.1% in the prior year and 56.7% in the prior quarter. As Carl detailed, the 3rd key pillar of our transformation is restructuring our selling and marketing.

Speaker 4

We recognize that selling and marketing, which is our biggest expense is higher than industry norm. So we have launched a series of initiatives that we expect will reduce our selling and marketing expenses from 50 5 percent of revenue to 45% during 2024. Let me explain the 3 main drivers of how we plan to get there. First, we announced on October 5 changes to our direct selling compensation plan. 2nd, for performance marketing, We are driving lower tech initiatives like refer a friend, new affiliate models and gifting.

Speaker 4

3rd, Our customer database reactivation strategy will drive new subscribers with minimal customer acquisition costs. We believe that these three drivers will lower our cash expenses for selling and marketing by approximately 1,000 basis points in 2024. On a hypothetical basis, this should represent $50,000,000 of additional savings on $500,000,000 of revenue. This is a new and additional benefit that drives cash flow starting in January. Moving on to other operating expenses.

Speaker 4

Enterprise Technology and Development was 14.7 percent of revenue compared to 15.5% in the prior year and 13.8% in the prior quarter. We have maintained our spend as a percentage of revenue, but reduced the dollar spend by 27% from last year. We continue to streamline the technology and development costs, while simultaneously improving our digital experience and enabling new functionality. G and A was 11.5 percent of revenue compared to 11.8% in the prior year and 8.8% in the prior quarter. The dollar spend was down approximately 24% from last year.

Speaker 4

Our G and A increased as a percentage of revenue in Q3 over Q2 because of an increase in non cash Stock compensation charges. We continue to aggressively manage our G and A, looking for more cost savings. Net loss was $32,700,000 Compared to a net loss of $33,900,000 in the prior year and a net loss of $25,700,000 in the prior quarter. Adjusted EBITDA was a loss of $5,800,000 compared to a loss of $6,200,000 in the prior year And a loss of $4,800,000 in the prior quarter. Our Q3 adjusted EBITDA includes a connected fitness inventory reserve charge of $3,400,000 Moving to the balance sheet and cash flow.

Speaker 4

Our cash balance was $38,200,000 Compared to $58,700,000 in the prior quarter. The decrease in the cash balance was largely driven by debt repayment of $15,300,000 Excluding the debt repayment, our cash balance declined by $5,200,000 in Q3 versus $7,700,000 in Q2 and $13,700,000 in Q1. Our cash used in operations in the Q3 was $200,000 versus $3,700,000 in the prior year and $6,500,000 cash used in the prior quarter. Our net inventory was $31,700,000 at the end of the quarter, down from $43,400,000 at the end of the prior quarter, which represents a 27% reduction, primarily driven by our bike inventory. We have successfully reduced our net inventory level for 8 consecutive quarters and we continue to aggressively look at our demand and supply requirements.

Speaker 4

We do not plan on allocating additional capital to bike purchases. Our CapEx for PP and E was $500,000 this quarter, a significant reduction from the $4,000,000 in the Q3 of last year And $1,600,000 in the Q2 of this year. Our CapEx for content was $2,900,000 this quarter, An improvement from $4,200,000 in the prior quarter. It was $3,100,000 in the Q2 of this year. So total CapEx in Q3 was $3,400,000 and that should be our approximate run rate in the coming quarter.

Speaker 4

The CapEx improvement have been driven by streamlining our content production and our technology staff. We continue to manage our cash use and are reducing cash needs despite the decline in revenues as we focus on positioning the company to generate positive cash flow. In fact, When you look at our year to date cash used in operations and investment activities, it was $24,000,000 That is down from $60,000,000 last year and $248,000,000 in 2021. We will continue down this path of dramatically improving our use of cash as we reposition the company to generate free cash flows. Turning to our outlook for the Q4.

Speaker 4

As a reminder, Our guidance is based on where we stand in our transformation journey. As you know, Q4 is seasonally the slowest quarter for the fitness industry and for our company. As a result, we expect 4th quarter revenues to be in the range of $105,000,000 to $115,000,000 We expect a net loss in the range of $25,000,000 to $30,000,000 and adjusted EBITDA loss in the range of $1,000,000 to $6,000,000 Now, I will turn the call back over to the operator to open it up for questions.

Operator

Thank you. Please remember to pick up your handset before asking your question and please do ensure that you are unmuted locally. We will pause here briefly as questions are registered. Our first question today comes from the line of Darren Tuttle from Singular Research, please go ahead. Your line is now open.

Speaker 5

Yes. Thanks, Guys, and a great quarter here. My question just comes up from The debt payment here. So that one, this latest debt payment, So that was a use of cash. Is that sort of a one off plan?

Speaker 5

Or is there going to be extended plans in the following quarters to have an accelerated debt Repayment schedule. Thank you.

Speaker 6

Hi, Darren. This is Mark. That was a one off in Q3. We paid down $15,300,000 of the debt. The we continue now on the regular schedule of the debt, and the total debt Carries out through February 2026.

Speaker 5

Okay. Okay. And Was that just part of cleaning up some of the balance sheet and opening up some cash flow for following quarters? Or was that more of just like a strategic allocation where you thought paying down the debt was the best incremental return for the dollar?

Speaker 6

Yes. Listen, we spoke with our lender. And if you look in early August, we filed Information relating to debt modification covenant on so that was all part of that negotiation with them, Where we changed the liquidity and revenue covenants on the debt. And given our outlook for managing With the capital we got on hand and our plan allows us to execute against that. But for now, there's no other Plans to further pay down the debt.

Speaker 5

Okay. Thank you for that.

Speaker 2

Thank you.

Operator

There are no additional questions waiting at this time. So I'd like to pass the call back over to Karl Duchner for any closing remarks.

Speaker 3

Okay. Thanks for joining us today, everybody. As we continue to execute on our turnaround plan, I want to leave you with the 4 key takeaways from the call today. First, we're widening the sales aperture to expand our sales channels and driving more profitable revenues through performance marketing, Our launch of the Body Previews free tier and Amazon. 2nd, we acknowledge that it's a difficult environment for most direct selling models, but We are increasing momentum throughout our network and with our partnership with Brendon Burchard and the introduction of the Growth Day personal development app this week.

Speaker 3

And we're aligning performance incentives with partner productivity and our overall financial goals. 3rd, We believe we're well positioned in an environment where there's increased focus on weight loss with our unique approach to structured fitness, Nutrition and personal development tools all at a great value to the consumer. And 4th, we're moving fast and continue to be focused on generating profitable revenues, driving free cash flow and building cash. I want to thank all our stakeholders for believing in this vision and for supporting the Beachbody Company through this process. Our work is extremely important, and I look forward to demonstrating significant progress in our next call.

Speaker 3

I'll add that investors and analysts can reach out directly to Mark We'd ask our CFO with any requests for meetings with management or with Mark Goldston and we'll keep you posted on

Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.

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