Gaia Q3 2024 Earnings Call Transcript

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November 4, 2024

There are 7 speakers on the call.

Operator

Good afternoon. Welcome to Gaia's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen only mode. Joining us today from Gaia are Yair Kharesove, Executive Chairman James Colhone, CEO and Ned Preston, CFO. After the speakers' presentation, there will be a question and answer session.

Operator

Before we begin, Gaia's management team would like to remind everyone that management's prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions, including but not limited to statements of expectations, future events or future financial performance. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. Although we believe expectations are reasonable, Gaia's management undertakes no obligation to revise any statements to reflect changes that occur after this call. Actual events or results could differ materially. These statements are based on current expectation of company's management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of Gaia's latest annual report on Form 10 ks filed with the SEC.

Operator

All non GAAP financial measures referenced in today's call are reconciled in the company's earnings press release to the most directly comparable GAAP measure. This call also contains time sensitive information that is accurate only as of the time and date of this broadcast, November 4, 2024. Finally, I would like to remind everyone that this conference call is being webcast and a recording will be made available for replay on Gaia's Investor Relations site at ir.gaia.com. I will now turn the call over to Gaia Executive Chairman, Yur Kara Saway. Thank you and over to you.

Speaker 1

Good afternoon, everyone. During the Q3, which is seasonally slow, we grew our revenue at a similar rate as the first time 1st part of the year at 10%. Gross profit increased 11% with gross margin improving to 86% from 85.2% at the year above quarter. Member count grew at the same period by 7%. The 3rd quarter was our 6th consecutive quarter of positive operating and free cash flow, which improved about $1,500,000 during the quarter this year.

Speaker 1

Over the last few months, we erased for the first time in our history, our subscription prices for all members by at least $2 While the initial losses from the price increase kept our member count for the quarter flat, we expect the increase the price increase will push our revenue up from the current $22,200,000 in this quarter to almost $24,000,000 during the Q4. And James will now speak more about other advances in the business.

Speaker 2

Hello, everyone, and thank you, Jerko. As mentioned, for the first time in Gaia's history, we began the implementation of a price adjustment for our legacy members as we have typically grandfathered members on legacy or old pricing. Following a successful pilot in the U. K. In Q3, we expanded this initiative to include our 3rd party platforms at the end of this quarter.

Speaker 2

While the decision uplift in revenue. And we are optimistic that members will return to growth in Q4 and that we'll close out the year with over 850,000 subscribers. At the start of Q4, we began price increases for our direct members on legacy pricing and early data suggests that this is already surpassing our expectations. This is a very encouraging indicator for revenue growth momentum as we move into 2025. Looking ahead to Q4, we expect our 1st full quarter of revenue contributions from Gaia Marketplace.

Speaker 2

And as Marketplace scales alongside our new pricing strategy, we anticipate gross margins to rise above 86%, a powerful improvement in our financial profile. Additionally, our marketing team's continued focus on attracting more annual members at sign up, together with increases in our tenured member base, has resulted in a substantial improvement in retention over the past 12 months. This stabilized long term member base sets us up for even stronger strategic positioning as we roll out the new pricing for legacy members. Q3 also highlighted the impact of our live events and premium membership tier. We hosted 2 GaiaSphere events, including our largest ever Ancient Civilization Conference and our sold out Gene Keys event.

Speaker 2

We're thrilled to see even more enthusiasm in Q4 with the recent sold out channeling event. And coming up this weekend, we will have our first ever HEAL conference. Finally, we're excited to announce our partnership with 11 Labs as Gaia's official provider for AI powered dubbing and translation services. This collaboration will allow us to streamline and accelerate the process of adapting our content for a global audience. By leveraging 11 Labs advanced technology, we'll be able to reach new viewers more efficiently in their native languages, enhancing the accessibility of Gaia's offerings.

Speaker 2

Looking forward to the end of the year and beyond, our focus remains on executing on the price increases for existing members, broadening the reach of our marketplace initiative, growing our premium membership tier and driving improvements in annualized ARPU. Our CFO, Ned Preston, will now provide deeper insights into our financial performance. Ned?

Speaker 3

Thank you, James. Turning now to our financial results for the Q3 ending September 30, 2024. Revenues for the Q3 grew $2,000,000 or 10 percent to $22,200,000 up from $20,200,000 in the year ago quarter. This also marked our 5th sequential period of year over year top line growth. Member count increased on a year over year standpoint to 846,000 as of September 30, 2024, up from 790,500 or 7% from September 30, 2023.

Speaker 3

Gross profit in the 3rd quarter increased 11% to 19,100,000 dollars from up from $17,200,000 in the year ago quarter. Net loss was negative $1,200,000 or negative $0.05 per share compared to the year ago quarter at negative $8,000,000 or negative $0.04 per share, driven primarily by the absence of the employee retention tax credit recognized in the Q3 of 2023. Adjusting for the $1,800,000 ERTC recognized in Q3 of last year, the quarterly net loss improved by 1 point $4,000,000 Free cash flow for the Q3 was $100,000 representing the 6th consecutive quarter of positive cash flow. In the last 9 months, both revenue and member growth were stable near 10% with an improvement in free cash flow of $1,600,000 on top of the $8,400,000 improvement delivered during 2023. As of September 30, 2024, our cash balance was $4,400,000 with an unused $10,000,000 line of credit.

Speaker 3

That completes my summary. I'd like to now turn the call back over to Jirka for his closing comments. Jirka?

Speaker 1

Yes. So for the summary, we expect increasing annual revenue growth rate with continuing growth of ARPU, which will be supplemented by the price increases as well. We obviously want to continue increasing gross profit for our employee and continue generating a positive free cash flow. This concludes our remarks. I would like to open the call for the question.

Speaker 1

Operator, please.

Operator

Thank you, sir. Ladies and gentlemen, we will now be conducting a question and answer The first question comes from Mark Argento with Lake Street. Please go ahead.

Speaker 4

Yes. Hi, guys. Good afternoon. Just wondering if you could dig down a little bit on when you took the price increase, kind of what did you see out of the subscriber base? Did you get some initial churn that it moderated?

Speaker 4

Or maybe you could just talk to kind of what the experience was there?

Speaker 2

Hey, Mark, it's James here. So with regards to the price increase, there's 2 elements to this. First of all, price increase for new members as we increase it for acquisitions. And then second of all, which I think is the meat of your question there in terms of impact on existing members. 1st and foremost, when we increase it for new members, we do see acquisition costs increase for a period of time and then they settle down and so that we're making the delta from the price increase, which we have seen happen, especially as we head into Q4.

Speaker 2

With regards to churn event on the existing cohort, so within Q3, we did a test cohort in the United Kingdom. In that region, we increased north of 30% because we had to make some adjustments for currency fluctuations. And we were very surprised with the results that we made by far a significant margin on the delta of that price increase. This encouraged us to roll it out to 3rd party, which we did to our 3rd party platforms at the end of Q3. And this had a slightly higher churn, I would say, than direct.

Speaker 2

I would say partially we don't have a close connection with the 3rd party in comparison to direct and what we call our apps, which makes up the vast majority of our members. We've started in Q4 price increases for our legacy member base. We're a month into those notifications and we're seeing a similar result to United Kingdom. We're very impressed and we're in a good spot to see our growth rate accelerate in Q4 and beyond.

Speaker 4

That's helpful. And then just from a timing perspective, when do you expect to have at least the vast majority of the subscriber base rolled over to the new price increase? Is that Q2 next year? Because obviously you got a bunch of annual guys still in there that you still need to roll forward, but how does that kind of the percentage of the base, how does that kind of where you are where are you now and where we'll be over the next couple of quarters?

Speaker 2

Sure. We should have circa 60% of our member base fully migrated over to the new pricing before the end of the year. The remaining maybe north of 60% remaining 30% to 40% will happen like you said because of the annual membership percentage in our legacy cohort. So this will be fully flushed through a year from now, but a majority of the price increase is going to be happening in this Q4. And so that we'll see a majority of that impact for the full year of 2025.

Speaker 1

Yes, Mark. So basically, as James says, most of it is now because all the monthly members and we have about half of the members are annuals. So then the firstly, the 40% pretty much equally spread over next 3 quarters.

Speaker 4

That's helpful. And James, you had mentioned Marketplace kind of launching or relaunching in Q4. We've got pretty busy calendar for some live events. What's your expectations for Marketplace and Gaia, I guess Gaia Plus as you roll not only Q4, but next year, how the breadth of offering there and how aggressive you're going to be in terms of marketing into your fairly large 800 plus 1,000 subscriber base?

Speaker 2

Sure. With regards to Marketplace, we officially launched it in August. So Q3, we had a partial contribution there. For Q4, it will be our 1st full quarter of contribution. And we don't typically share independent data based on these business units.

Speaker 2

And what I will say though is that marketplace will cross sort of P and L positive in terms of revenue per quarter and cost of headcount per quarter around middle of next year. And from that point onwards, we'll be scaling it out. With regards to Gaia Plus, the premium membership tier, what we're seeing is that that's outpacing our total membership growth at about 3x to 4x. So we're growing that at a faster rate in comparison to the total member count. And what that's doing along with the price increases, we're really pivoting the organization, I would say, strategically to focus more on ARPU as well as total subscriber growth, but that ARPU and revenue growth is sort of the key is a key focus for Ned, myself and Yiriko.

Speaker 4

Great. That's helpful guys. I'll hop back in the queue.

Speaker 5

Nice quarter.

Speaker 2

Thank you. Thanks Mark.

Operator

Thank you. The next question is from James Sidoti with Sidoti and Company. Please go ahead.

Speaker 6

Hi, good afternoon. Thank you for taking the questions. I heard you mentioned 2 events this quarter. Will there be more marketplace or more, Gyre plus events in the Q4?

Speaker 2

Hi, Jim. It's James here. So these two events will be our last events of the year, and then we'll kick off again next year with new events. So this year we'll have one of the, for the total 24 year, we'll have the most events that we've ever run-in 1 year. And we're seeing great attendance.

Speaker 2

And like I mentioned to Mark, we're seeing the premium tier growing at a great clip, especially from member upgrades, which is a good sign for us. So yes, just one more event to go and we had a sold out event just recently.

Speaker 6

And the price increases, do they impact the Gaia Plus membership? Or were they for the standard Gaia memberships alone?

Speaker 2

So currently it's just for the standard Gaia memberships alone. We have been leaning into the Gaia Plus premium tier in terms of production of content like I mentioned with the most events this year. As we look to 2025 and beyond, we will be revisiting the price point for the premium tier once we build out the on demand library accessible to those members.

Speaker 6

And can you talk a little bit about what your expectations are for marketplace? When do you I know you said you think you expected to be profitable by the second half of twenty twenty five, but when do you think it will really kick in and be a significant contributor to revenue?

Speaker 1

This is Yirka. We place as a first step of community. We want to introduce the community full blown in Q1 2026. So we want to have marketing because it takes us some programming to kind of get it incorporated in our system with all the experiences, which is kind of new. So we the goal is to make it profitable in mid of this year.

Speaker 1

And so the next year when we launch full community would be full contributor to the community, of course, also through revenue of Guyana.

Speaker 6

Okay. And that the launch of community that would include the Ignaton launch as well, I'm assuming?

Speaker 1

Hopefully, the Ignaton launch would be before that then somewhere later in the year this year.

Speaker 3

Yes. So just to clarify hey Jim, it's Ned. Just want to make sure that that's clear around the timing of Ignaton. That will be middle of 2025. So we're probably June 2025 is what we're shooting.

Speaker 6

Okay. And your free cash flow positive again. Do you think these trends continues? Do you think that you'll need to go out and raise any capital in the near term? Or do you think you'll be able to sustain your growth with the existing capital or existing cash you're generating from the businesses now?

Speaker 3

Yes. So hey Jim and this is Ned and James and Nir can weigh in. So I'm going to separate that into Gaia. I believe you're talking specifically about Gaia. So no immediate is it Gaia or Ignitin you're asking about?

Speaker 6

No, Gaia. No, Gaia. For the Gaia.

Speaker 3

Yes. So with the as we said, 6 quarters in a row of generating free cash flow, we don't have a need to go out and raise cash at this time. With that being said, similar to what we did almost exactly 12 months ago, 13 months ago of doing a raise, we always look for opportunities, but no immediate plans to do so.

Speaker 1

Yes. We're planning to refile our S3, which expired this year as we always do, but we don't have an immediate plan to do anything.

Speaker 6

Okay. Thank you.

Speaker 2

Thanks, Jim.

Operator

Thank you. The next question comes from Thierry Woulart with Water Tower Research. Please go ahead.

Speaker 5

Yes, good afternoon. Just a question on the mechanics of the price raise, if you can kind of give us a little bit of sense there. How does that you reached out to your members and then do they have to do something or they just don't have or as long as they don't do anything, nothing happens? I'm just curious how that work how you implemented that?

Speaker 2

Hi, Thierry, it's James here. So around the world, different countries have different legislation when it comes to increasing prices. A vast majority of the world is what's called non consent whereby you send an e mail notification to the member 30 days before the price increase and it increases unless they go and actively unsubscribe. Now there's a very small amount of territories that are consent mode where the members need to actively approve the price increase. This stage for the increase we're focusing on non consent countries and we'll be adding the consent countries as we move into 2025.

Speaker 2

It's just a larger dev lift on our engineering team. But so far as we've been sending out the notifications and comparing it to our test project in the United Kingdom. The results are very encouraging and it gives us a sense of that we have pricing flexibility in the market given the aggregate of niches that we serve. And yes, we're excited for its impact on revenue so that we can continue to expand the brand and reach more members as we grow.

Speaker 5

Okay. And then maybe just a question on Event Plus. How do you translate that into the live event? How do you translate that into maybe increasing Gaia Plus membership or just increasing in overall new members or so? How do you integrate the event with your marketing program?

Speaker 2

So Terry, we typically use the live events as a promotional opportunity for Gaia. Not only does it accentuate the community element of our mission by bringing people together at our GaiaSphere event center here in Colorado, but it also adds a tangibility to the experience of Gaia. And this often encourages many members to upgrade and also people that are new to the brand to have an experience with Gaia and then considering in joining. We've seen with the accelerated events that we've run this year that we're growing Gaia Plus premium membership at an increasing rate and it's healthy for the long term economics of the business.

Speaker 5

Great. Do you have any numbers you can share in terms of how many attendees online or just any color around that?

Speaker 2

So with regards to the membership base, like I've mentioned to Mark, we are growing that at 3x to 4x the rate of our overall member growth. So that's a really encouraging sign. In terms of the live stream attendees, we open specific events wider for promotional activities like we did in March of this year with the Immersion Conference. So we had over 52,000 unique live stream attendees. We likely won't be offering the same level of open experience until Immersion again next year.

Speaker 2

And so I can report more once we've completed that event, which we're already selling tickets for.

Speaker 5

Okay, great. Thank you very much.

Speaker 3

Thanks, Thierry.

Operator

Thank you.

Speaker 1

Okay. As I hear no questions, I would like to thank you for joining and we look forward to speaking with you when we will report our Q4 results in March. Thank you.

Operator

Thank you for joining us today for Gaia's Q3 2024 Earnings Conference Call. You may now disconnect.

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