Gaia Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2023

There are 5 speakers on the call.

Operator

Afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia's Financial Results for the Q2 Ended June 30, 2023. Joining us today are GAIA's CEO, Jirka Rysavy and CFO, Ned Preston. Following some prepared remarks, we will open the call for your questions. Before we get started, however, I would like to take a minute to read the Safe Harbor language. March.

Operator

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 our ability to attract new members and retain existing members, our ability to compete effectively, including for customer engagement with for modes of entertainment, maintenance and expansion of device platforms for streaming fluctuation customer usage of our service fluctuations in quarterly operating results, service disruptions, production risks, general economic conditions, future losses, loss of key personnel, price changes, brand reputation, acquisitions, new initiatives we undertake, security and information systems, legal liability for website content, failure of third parties to provide adequate service, future Internet related taxes, our founders' control of us, litigation, consumer trends, the effect of government regulation and programs, the impact of public health threats including the coronavirus COVID-nineteen pandemic and our response to it and other risks and uncertainties detailed from time to time in our filings with the Securities and exchange commission, including our reports on Form 10 ks 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, Irdka Khorsavi.

Operator

Please go ahead.

Speaker 1

Good afternoon, everyone, and I'm glad that we can report positive results. Revenue for the Q2 increased again sequentially to $19,800,000 from 19,600,000 But it's still down from the last quarter of $20,700,000 due to post COVID subscriber construction as experienced industry wide during 2022. Member count increased during the quarter by 8,000 to 774,500 is virtually all the growth coming from our direct subscribers. Our ARPU, which is showing steady growth, as it increased at from $7.95 in 20 19 to 8.40 in 2020 to 8.60 in 2021 and 8.75 in 2022. It now shall be further supplemented by the launches of Gaia Marketplace, which is now rolling to a select group of our members.

Speaker 1

The total operating expenses in the quarter were about $950,000 higher than in year above quarter, still including a tale of the contracts and related expenses incurred as a result of our 20% staff reduction that was completed during the Q1. While we still reported GAAP loss, the company has returned to net cash generation. Cash balance in June 30 was $10,900,000 And I would let Annette now speak more about the results.

Speaker 2

Thank you, Jirka. Revenues for the Q2 were $19,800,000 a slight sequential increase for the 2nd consecutive quarter, continuing the return to growth in our member base during the first half of twenty twenty three. Compared to a year ago quarter, revenues declined 4% due primarily to the hard compare against Q2 2022, which benefited from the COVID related subscriber growth in 2020 2021. In the quarter, we continue to invest in and release new content, particularly to support our language expansion efforts. As a result of these strategic growth investments, gross margins were 85.7% during the Q2 of 2023 and we expect them to remain at this level in the near term as we expand our language offerings and tactically support the growth of the business.

Speaker 2

Total member acquisition costs during the quarter were $8,200,000 or 41 percent of revenues compared to $7,200,000 in the year ago quarter. In the quarter, we benefited from our efforts to optimize customer acquisition costs over the past several quarters with per customer acquisition cost down 9% sequentially. In the 2nd quarter, we experienced growth in our direct member base, which is a continuation from the Q1. Additionally, we witnessed a return to growth among our largest third with the Q1. The growth in both our direct member base and third party member bases during the quarter is building our confidence that we are through the worst of the post COVID member unwinding.

Speaker 2

Selling and operating including marketing and member acquisition costs in the 2nd quarter were $8,900,000 or 45 percent of revenues, which is up slightly from the prior year period. This increase reflects the end of contracts and related expenses incurred as a result of the company's cost improvements that were completed during the Q1. Corporate G and A and corporate expense in the 2nd quarter were $1,500,000 or 8% of revenues, down 15% from the prior year period. We expect to realize most of the benefits of the cost reductions undertaken in the first quarter and the second half of twenty twenty three and anticipate the cost $7,000,000 or negative $0.08 per share compared to the net income of $100,000 in the year ago period. The decline was primarily driven by the reductions in revenues between periods.

Speaker 2

Adjusted EBITDA was $3,100,000 or 16% of revenues in the quarter and we generated free cash. Our deferred revenues for the 2nd quarter were $15,500,000 an increase $1,400,000 from the year ago period. We expect to continue to benefit from the inherent negative working capital cycle in our business model as we continue to grow our member base and revenues. In addition, we expect to be in a position to continue generating cash flows from operations in excess of the cash flows we reinvest back into our content library and production enhancements going forward. Due to our in house production capabilities and lack of contractual commitments tied to our content production.

Speaker 2

We have significant discretion in the amount and timing of our investments. This flexibility allows us to adjust our investment levels as needed to withstand a downturn a macroeconomic environment if necessary. Through the company's focus on accelerating growth and a return to positive operating margins, We have made tremendous progress over the past several quarters on numerous key areas of improvement for the business. With continued disciplined execution and the launch of Gaia Marketplace, we are well positioned to continue growing revenues and to remain cash flows positive going forward. With that, I will hand it back to Jirka for some closing remarks.

Speaker 1

Well, with the cost tail of our staff reduction now being gone, Our annualized gross profit for employee recently reached all time high of over 610,000. With the member growth in July running above the pace for the 2nd quarter, plus GAIA marketplace beginning to be rolled out to improve our ARPU and revenue, We can look for a stronger second half of the year. And with that, that concludes our remarks and I would like to open it for the question. Please, Maria. Operator, please.

Operator

Thank you, sir. We will now be conducting a question and answer session. Season. Our first question comes from Mark Argento with Lake Street. Please proceed with your question.

Speaker 3

Hey, Yurka. Hey, Ned. Just wanted to drill down a little bit on the customer acquisition or subscriber acquisition cost. Are you seeing the cost to acquire in terms of going out by keywords or other types of online ad What trends are you seeing there? Do you think it's sustainable to be able to kind of cost effectively acquire at this point?

Speaker 1

Hi, Mark. Thanks. We generally will See right now the cost of acquisition is definitely improved from the last year when this the overall environment was much more negative still with the post COVID. So this year, We target generally about 39% to 41% of revenue. It depends on efficiencies.

Speaker 1

We were on higher end of it because the efficiencies start to be good. And I kind of hope that that will kind of continue as what it is. 2nd, with COVID gone also seasonality came back Q2 was historically our slowest quarter. So we were pleased with the actual results. And I think as we are kind of focusing on some of new initiatives.

Speaker 1

We talk about it now for a little bit for focusing on the members with higher retention just rather than just low cost. It's definitely the overall growth start to be helped by the improved retention. Does it answer your question?

Speaker 3

Yes. No, that's helpful. It sounds like Just shifting gears quickly, obviously nice to see you guys cash flow positive in the quarter. I mean, I think in your prepared remarks, did you say you anticipate that being good cash flow positive going forward? Is that what I'm hearing?

Speaker 2

Yes. Hey, Mark, it's Ned. Thanks for the question. That is correct. So Q2 was a big transition quarter for us in moving to that positive cash and we do anticipate forecast that continuing for the second half.

Speaker 1

Yes, the improvement in the quarter between from the Q1 was about $1,300,000 in a positive direction. And so we kind of hope that with all the tail of the staff reduction being gone, that obviously that will

Speaker 4

improve.

Speaker 3

Great. It's good to hear. Just last one for me. In terms of the marketplace, could you just refresh us What should we look for there in terms of a rollout or how does that stage out over the next quarter or 2?

Speaker 1

Yes. So we just kind of right now rolling it to small amount of people. We're putting it from about 10 20,000. Our members, active members and see kind of their response. So we kind of know how to market because there's several way to display it, mostly on a screen of those people as we can target.

Speaker 1

And as we kind of looking a lot for like experience rather than products, our first product We attached to our ancient civilization series. We also have a conference what's called Predulubil civilization. So we go and have We're marketing a tour to Preludely Egypt, which is probably about 8000 to 10000 in Ranch. We kind of obviously jobbing it out, we keep about 30% of that. That's what we will be booked as get 10% discount that come from our side.

Speaker 1

So that's roughly how it goes. We're going to slowly increase the number of people and then it's We see it's running smooth. We had other experiences of potential some products. So it's something what I think as we go to end of the year, it should start really meaningfully improve our ARPU and hopefully So the revenue of course.

Speaker 3

That's super helpful. I appreciate it. I'll hop back in the queue. Thanks.

Speaker 1

Thank you.

Operator

Our next question comes from Thierry Wolod with Water Tower Research. Please proceed with your question.

Speaker 4

Yes. Greetings, Jokar and Ned. Mark covered quite a few questions there. But I was curious, you had some good momentum you told us from the foreign language subscribers earlier this year. Is that continuing?

Speaker 4

Can you give us some color there?

Speaker 1

Yes, that's kind of started already like a couple of quarters and it's increasing. We did invest in the languages Over the last 2 years, as we were dealing with COVID, we didn't have so it was more challenging marketing environment and we didn't want to fight it. We've already reserved the cash last year. So we did spend it on getting ready for still a language offering, especially in the French and German, as the Spanish was existing before. So obviously, those are the languages we kind of going there.

Speaker 1

And anytime you go to new language, especially in Which especially in some European countries, we kind of ahead of the curve. There's not a really strong offering on those languages. So we so far see both acquisition cost And retention being better than in the U. S. So we're probably spending more kind of increasing.

Speaker 1

Our international membership, it's right now about 35% overall because our direct. So our 3rd parties like Amazon, YouTube, Comcast, they're all in English. So if I take our percentage of our direct, It's probably more on high 40s as a percentage. But either when, if you look at Netflix, they're about 2 thirds. So I over the next few years our international percentage will grow providing the trend what we feel right now will sustain.

Speaker 4

Great. Thank you. In terms of your, I guess, not just your U. S, but all your subscribers, your subscribers, your members. Do you have any color on consumption?

Speaker 4

Are you seeing more consumption of your content or no real differences there post the whole COVID situation?

Speaker 1

Well, I mean during the COVID, We had more viewing and more subscribers there. But after the post COVID wave, when those subscribers like everywhere left. So we kind of saw obviously we kind of saw a Increased post COVID, but I have to say that starting this year in the Q1, Which is kind of going to that people start to have a free time last year. I mean, they could Travel like they can do now. We actually see increases this year.

Speaker 1

Again, we used to see it before For COVID, when quite high, it was like it came down, but now as we see increases on the viewing again.

Speaker 4

Okay. Any update on do you have some Event Plus scheduled for the balance of the year? Can you give us Some updates there?

Speaker 1

Sure. We have about 2 weeks. We have our one of the main conferences, what we call ancient civilization, which is about 10, 11 speakers, which is kind of one of our key conferences. So that's coming, I think, 12th, 13th August with another one like a few weeks later. So we're going to you probably see our cadence and promotion of all events plus Will probably increase with the kind of we obviously have a little bit of disruption through COVID, so we're picking up or we kind of before.

Speaker 1

So I think it's a we didn't focus on it till beginning of this year, but I think the 2nd part of the year, It will be focused on it and I think with Gaia Marketplace getting launched we also have a better way how to promote it.

Speaker 4

Okay, great. Well, thanks. I appreciate the update.

Speaker 1

Thank you.

Operator

Our next question comes from Mark Argento, Blake Street. Please proceed with your question.

Speaker 3

Hey, guys. Just a quick follow-up. So kind of just going everything down, maybe just an update on at 5000, 10000 feet, kind of the strategy for the company here. Now that looks like you're able to cost effectively acquire subs again, You're going to lean into growth a little more aggressively, maybe just maybe a little higher level, Jirka, how you see the world right now and kind of where you guys are after the high and the low of the COVID and then the post COVID overhang, it seems like maybe we're kind of normalizing a little. Given the kind of the environment we're in and what you're seeing, what's the higher level strategy at this point?

Speaker 3

Thanks.

Speaker 1

Well, it's just like from the like beat in the SACL level. It's I actually could see from my point that because now we kind of the new team as we have couple of new additions, It's kind of side of click and it's really good team as a chemistry wide. So I'm very pleased with that. And Obviously, with the growth and increasing ARPU, it's I feel pretty good about where we're heading. So I think you can expect The company acceleration and producing positive cash flow.

Speaker 1

And I think the question cash flow versus growth. I think we want to really start to increase the growth, but at staying in positive cash flow. So basically we want to stay in positive cash flow and we generate more dollars, we put it back in the growth, but we do not go negative free cash flow. So I think that's pretty much where it is. It's pretty simple right now.

Speaker 1

Grow as fast as we can without going negative in the cash flow. And the cost per employee which is the gross profit for employee which is $610,000 which is you start to be up there. And as long as we can keep it on these levels, I think that the cash flow and Profitability would kind of come from there as well. But I think it's grow as fast as we can without and while

Speaker 2

It's a big reason why I came to Gaia, just because of that leverage. I'm just very impressed with a company that runs with around 110, 120 full time employees driving over $8,000,000 of revenue. But the efficiencies that I've seen and the ability to pull the levers when needed around increased marketing spend for the right reasons, It really is impressive. So as I said in my commentary earlier, the continued execution against the existing plan Is very much what I look forward to here, but we just really look forward to the upside leverage of that model.

Speaker 1

And also to mention, as Ted talked about leverage, our as Ted mentioned, our gross margin came 90 basis points or something down. It's actually was purely because we keep growing, putting new content and with the revenue slowdown last year, It changed the ratio compared revenue, but if you look at what we call net, we have Basically aligned what you call a cash contribution. It's basically cash margin that how much what it will cost to have a new customer. That's kind of the same number, but less amortization. That actually increased from 90 3% to 94% of revenue.

Speaker 1

So from the cash point, how margins actually expanding is where we're talking

Speaker 4

free cash flow.

Speaker 3

Very helpful. Good luck the rest of the way this year guys. Thanks.

Speaker 2

Thanks Mark.

Operator

There are no further questions at this time. I would now like to turn the floor back over to Jirka Rousavy for closing comments.

Speaker 1

Well, thank you everyone for joining and we look forward to speaking with you while we report our Q3, Which should be in early November. Thank you very much.

Operator

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

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Key Takeaways

  • Gaia reported Q2 revenue of $19.8 million, a slight sequential increase but down 4% year-over-year amid the post-COVID subscriber unwind; total members rose by 8,000 to 774,500—driven primarily by direct subscriptions—and ARPU climbed to $8.75 with the upcoming Gaia Marketplace expected to further boost monetization.
  • The company returned to net cash generation in Q2, achieving an adjusted EBITDA of $3.1 million (16% margin) and ending the quarter with $10.9 million of cash; management forecasts continued positive operating cash flows and benefits from its negative working capital model.
  • Operating expenses in Q2 were $950,000 higher than the prior year due to the tail-end costs of a 20% staff reduction, but corporate G&A declined 15% to 8% of revenues, and most cost-reduction benefits are expected to materialize in the second half of 2023.
  • Gross margins stood at 85.7%, reflecting strategic investments in new content and language expansion (notably in French and German), with management emphasizing its in-house production flexibility to adjust spending and navigate macroeconomic headwinds.
  • Key growth initiatives include rolling out Gaia Marketplace to enhance ARPU, accelerating international subscriber growth (now about 35% of direct members), and increasing promotion of Gaia Events Plus in the second half to drive engagement and revenue.
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Earnings Conference Call
Gaia Q2 2023
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