Beachbody Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 6, 2024

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Beachbody Company First Quarter 20 24 Earnings Call. I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to our host, Bruce Williams, Managing Director of ICR Investor Relations.

Speaker 1

Welcome, everyone, and thank you for joining us for our Q1 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 Marc 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 financial measures such as adjusted EBITDA, net cash and free cash flows. 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.

Speaker 2

Thank you, Bruce, and good afternoon, everyone. 2024 is off to a strong start as we continue to deliver against our strategic initiative and remain steadfast in our turnaround plan. With our efforts thus far in 2024, we have some great news to announce. 1st, I'm thrilled to share that we beat the midpoint of our revenue guidance and achieved quarter over quarter revenue growth for the first time since Q4 of 2021. 2nd, we exceeded the midpoint of our adjusted EBITDA guidance and we've now delivered positive adjusted EBITDA for 2 consecutive quarters and today we reported our highest adjusted EBITDA since going public back in 2021.

Speaker 2

And third, we reached a critical milestone of becoming free cash flow positive this quarter, once again a first for our company since 2020. As a reminder, the goal of our turnaround strategy centers on: 1, continuing to enhance our cash position and balance sheet 2, transforming our cost base and re architecting the enterprise to dramatically reduce our breakeven point without compromising the core business model that generates revenue and 3, launching a series of initiatives to refine the business model and drive top line growth. In terms of where we stand in the turnaround process, we feel that we are considerably ahead of schedule. Let me walk through the details of our 3 key turnaround strategies. 1st is enhancing our cash liquidity and balance sheet position.

Speaker 2

We reported our 1st positive free cash flow quarter since 2020. During the quarter, we took additional strategic action to fortify our liquidity position by engaging in a sales leaseback transaction and divesting a non core investment, which resulted in a $7,000,000 debt reduction. As a direct outcome of that, our loan balance has been cut in half since I joined in June of 2023 from a level of $50,000,000 to now $25,000,000 In April, we proactively amended our revenue covenants through our term loan with Blue Torch Capital. We finished Q4 2023 with a net cash position of $4,000,000 But at the end of Q1 2024, we showed continued improvement with positive net cash position of $14,000,000 This transformation in just 1 quarter is impressive and resulted in a $10,000,000 liquidity improvement sequentially. Additionally, our amended debt covenant lowered the quarterly revenue threshold from 120,000,000 dollars down to $100,000,000 per quarter and this will last until December 31, 2024 and then subsequently it will

Speaker 3

go to

Speaker 2

$110,000,000 per quarter beginning in Q1 of 2025. We believe this demonstrates that our lenders have confidence in our progress to run a positive free cash flow business at a much lower revenue threshold requirement. 2nd, we're transforming our cost base and re architecting the body enterprise to dramatically reduce our breakeven point. In what we believe to be a very short period of time, we have successfully reduced our revenue threshold from over $900,000,000 in 2022 to less than $500,000,000 in 2024 to be in a cash generating position. That's more than a $400,000,000 reduction in the breakeven threshold for the company.

Speaker 2

What's important about that is that we've built operating leverage into the P and L at the current run rate of revenues and believe that as our turnaround gains traction, we will drive significant operating profit over time. We stated that we would generate over $250,000,000 in cost savings in 2024 versus where the company was back in 2021, So a long process of improving the cost structure. And we're currently at a run rate to deliver these savings in 2024 and this has been demonstrated by our Q1 2024 results. And third, we developed revenue initiatives designed to drive top line growth, and we're thrilled to announce that we grew sequential quarterly revenues for the first time since 2021. Looking forward, we're excited about our existing and upcoming innovation pipeline, which focuses on expanding consumer access to our rich catalog of programs and we'll also be exploring strategic partnerships and developing innovative marketing programs, which will expand the distribution of our nutrition business among other initiatives.

Speaker 2

Our performance reflects many proof points that the strategy and disciplined focus of the turnaround plan we constructed after my arrival in June of 2023 are working and we're tracking ahead of schedule on critical milestone achievements. I like to create strategic imperative lists that focus on 5 key areas. I've been doing that for decades in the companies that I've run-in. I'm pleased to announce that the company has already achieved the 5 key strategic imperatives of the turnaround plan that we established after my arrival in June of 2023. Let me quickly review these 5 key strategic imperative accomplishments.

Speaker 2

1, we strengthened our liquidity position. 2, we dramatically lowered the breakeven point of the company. 3, we delivered positive adjusted EBITDA now for 2 consecutive quarters. 4, we built substantial operating leverage into our P and L and 5, and thus far in 2024, we achieved our 1st positive free cash flow quarter since 2020. As a reminder, we are still in balance sheet optimization mode, which means we will remain hyper focused on maximizing cash and liquidity.

Speaker 2

Therefore, we will continue to focus on executing our turnaround plan to optimize cash generation from our valuable asset base. We're on track to build a company that not only delivers positive adjusted EBITDA and positive free cash flows, but also achieve the 3rd element of the critical financial measurement of a turnaround, and that will be delivering GAAP net income, which will be our next key milestone in the impressive and might I say rapid turnaround of Bodi. Now, I'll turn it over to Carl to discuss our top line revenue growth initiatives. Carl?

Speaker 4

Thanks, Mark, and thank you, everyone, for joining our Q1 earnings call. Achieving our first free cash flow positive quarter since 2020 is a major milestone in our turnaround, and we look forward to sharing more proof points now as every quarter unfolds. I'll walk through our key revenue initiatives, which align with our overall mission to help people achieve their goals and live healthy, fulfilling lives. 1st, we just launched our digital program purchase initiative that we're extremely excited about. Think of it as the iTunes model of buying music but for fitness programs, where customers can now buy and stream programs from our fitness and nutrition library without a subscription.

Speaker 4

We believe there's latent demand for our library of content from programs that were bestsellers and famous on DVD like P90X and Insanity to other popular programs which have never been on DVD like 80 Day Obsession, Lift 4, and Shaun T's latest program called Dig Deeper. We're now giving consumers the ability to purchase the individual programs, which is actually the business model that propelled the business for 20 years. Each month, we'll be offering additional titles from our library of over 120 programs for sale in body's new shopprogramstore@bodi.com. And we're confident that this new initiative will cater to people who prefer to buy a specific program rather than subscribe to the entire library. We believe that we're the only major player in home fitness who has a catalog that makes this kind of commerce viable.

Speaker 4

And again, we believe that expanding access to our content provides an extremely compelling marketing opportunity and then we can introduce those new customers to the benefits of our fitness and supplement subscriptions once they experience the efficiency of our tested approach to step by step training. We're in the early stages of marketing and refining the digital purchase program to maximize LTV by bringing new people to the platform and then upselling them additional programs or digital subscriptions and supplements. Next, within our nutrition business, we've expanded our sales channels. And in March, we launched more aggressive marketing campaigns across our entire ecosystem, highlighting the superiority and quality of our formulations. These marketing campaigns will highlight a key product every month to our existing member base, and we're further broadening our distribution by working with social media influencers to test and review and promote our nutrition products and to transact through a simplified checkout process on social media platforms.

Speaker 4

Looking ahead, we're reviewing an extensive range of pricing and packaging and portion configurations to determine the best way to generate trials and conversions and repeat purchases of our nutrition products. We're doing this across all our sales channels, including our network of partners, our direct to consumer marketing, and now on Amazon. More news on this will be shared as we expand these activities in the coming quarters. Okay. Now moving to Amazon.

Speaker 4

We're encouraged by the growth that we've seen this quarter. Sales on Amazon increased by over 50% both sequentially and year over year from Q1 2023. Now while this is starting off a smaller base, the growth gives us confidence that we have the right products, strong brand recognition and the right price points. We recognize that we have a real opportunity to expand access to our incredibly effective nutritional products and we're seeing positive compounding results from our distribution partner on Amazon. And last, I want to highlight the progress we've made with reactivating our extensive database of former and prospective customers.

Speaker 4

We continue to execute against our strategy of sending targeted messages and special offers to drive conversion. But the process of methodically combing through this large database is taking longer than we anticipated as we test and formulate our messaging and formats for email and text messaging. We have a new team leading this project, and we remain very optimistic that this will be a very effective customer acquisition and engagement tool that will drive LTV with minimal CAC. I think it's also important today to discuss weight loss pharmaceuticals and their potential related impact on body and the overall weight loss industry, if I may. Several analysts have published reports that fitness is not impacted by the weight loss pharmaceutical business, but meal replacement and snacking consumption is actually being negatively impacted.

Speaker 4

The science is very clear that consumers who are using GLP-one drugs need to augment that investment with fitness and nutrition to maintain muscle mass and prevent other side effects. Scientific studies have consistently shown that the best preventive medicine for overall health and longevity is exercise and healthy eating. And there's our opportunity. BODI is the one comprehensive fitness and nutrition company that can truly complement this wave of pharmaceutical innovation. And we have not seen a negative impact from the adoption of GLP-one.

Speaker 4

In fact, whether you're a GLP-one consumer or not, we remain the most effective and affordable fitness and nutrition solution for Okay. Now let me turn the call over to Mark Swedan to walk through the specifics of our Q1 financials. Mark?

Speaker 3

Thanks, Karl, and thank you, everyone, for joining the call today. I'm very pleased with our Q1 results that we just released. As Mark and Carl mentioned, we have hit several key milestones in our turnaround journey. We remain on track to achieve approximately $250,000,000 in cash cost savings in 2024, in line with our business rearchitecture plan that we began back in 2021. I will now provide a review of our Q1 financials starting with revenues.

Speaker 3

Revenues were $120,000,000 for the quarter, which was above the midpoint of the guidance range and an increase from Q4 of 2023. This would mark the 1st sequential revenue growth in the past 8 quarters. Compared to the prior year Q1, revenues declined 17% year over year. Digital revenue decreased 4% from the prior quarter to $62,000,000 and decreased 5% year over year. We believe that digital revenue continue to be relatively stable.

Speaker 3

We ran a successful BOGO promotion, which stands for buy 1 year, get the 2nd year for free, that resulted in strong cash generation. However, less digital revenues were recognized this quarter due to the BOGO promotion as we deferred digital subscription revenue over the 2 year period of the promotion. Our overall digital subscriber count was 1,200,000 of which 100% are now on the BODY Premium platform. Nutrition revenue increased 7% from the prior quarter to $56,000,000 and decreased 25% year over year. This marks our 1st sequential nutrition revenue increase since Q1 of 2022.

Speaker 3

We are pleased that our nutrition revenue grew this quarter sequentially, showing early signs of improvements within our turnaround plan. It is important to note that we are still in the early stages of reinvigorating our nutrition business and it will take more time to grow the nutrition business sustainably. At the end of Q1 2024, our nutrition subscriptions were $150,000 compared to $160,000 in the prior quarter. Connected Fitness revenue was $3,000,000 in line with the prior quarter and 50% below the prior year Q1. We will continue to strategically use promotions to sell our existing inventory.

Speaker 3

We are very pleased to announce that gross margin improved dramatically in Q1 of 2024. The company achieved a gross margin of 67.7% for the Q1, which increased 550 basis points from 62.2 percent in Q4 of 2023 and increased 4 70 basis points from 63% in Q1 of 2023. This was the highest gross margin reported by the company since we went public in Q2 of 2021 when we had a gross margin of 69.2%. Digital gross margin was an impressive 79.1% for the quarter, which represented a 600 basis points improvement over the 73.1% in Q4 of 2023 and 220 basis points higher than the 76.9% in Q1 of 2023. As we discussed in the last earnings call, our 2024 digital gross margin will benefit from lower content amortization as our production and content spend has become more efficient.

Speaker 3

Our goal is to drive digital gross margin to over 80%. The company also recorded major improvements in nutrition gross margin during the quarter. Nutrition gross margin was 59.9%, representing a 6 70 basis points increase from the 53.2% in Q4 of 2023 and a 180 basis points improvement from 58.1% in Q1 of 2023. The year over year improvement was driven by carefully managing inventory and pricing. Connected Fitness gross margin was minus 19.5% for the quarter versus minus 13% in the prior quarter and minus 25.7% in the prior year Q1.

Speaker 3

Our Connected Fitness business is less than 5% of our total revenues and as shared on previous earnings call, we are focused on selling on hand inventory to generate incremental cash. While we're not actively looking to expand the Connected Fitness hardware business, we are still very focused on ensuring that we will continue to deliver the finest Connected Fitness content. Moving on to operating Fitness content. Moving on to operating expenses. Excluding the asset impairment and restructuring charges, operating expenses for the quarter were $90,000,000 versus $91,000,000 in the previous quarter and $113,000,000 in the same quarter last year.

Speaker 3

This represents a $23,000,000 reduction in operating expenses versus the same quarter last year. Selling and marketing expense was reduced to 49% of revenue compared to 50% in the prior quarter and 53% in the prior year's Q1. We remain on track to achieve our 1,000 basis points improvement in EBITDA from selling and marketing expense reduction and our lower preferred customer discounts. This benefit would equate to $50,000,000 based on revenues of $500,000,000 Technology and Development was 15% of revenue in the current quarter and prior quarter compared to 13% in the prior year Q1. G and A was 11% of revenue in line with the prior quarter and it was 12% in the prior year's Q1.

Speaker 3

The company recorded a significant reduction in our net loss for the Q1. Net loss was $14,000,000 in Q1 of 2024 compared to a net loss of $65,000,000 in the prior quarter and a net loss of $29,000,000 in the prior year's Q1. This represents a major improvement of 52% from the prior year Q1. Adjusted EBITDA, which has now been positive for 2 consecutive quarters was $5,000,000 in Q1 of 2024 versus $3,000,000 in Q4 of 2023 and a meaningful improvement compared to the minus $1,000,000 in Q1 of 2023. We believe that this is a clear indicator of the effectiveness of the company's turnaround plan and the overall reduction in the breakeven threshold that we have engineered.

Speaker 3

Next, moving on to the balance sheet and cash flows. Our cash balance was $39,000,000 compared to $33,000,000 in the prior quarter. This improvement was driven by cash generated from organic operations. Our net cash position, which is our cashless debt as described in our earnings release, increased from $4,000,000 at December 31 to $14,000,000 at March 31. This $10,000,000 liquidity improvement in a 90 day period was driven by our focus on cash generation.

Speaker 3

Our operating cash flow in the Q1 was $9,000,000 versus cash used in operations of $9,000,000 in the prior quarter and $8,000,000 cash used in Q1 of 2023. Year over year, this is a $17,000,000 improvement driven by our turnaround plan, which created the ability to run the business in a cash generating position at this level of revenue. Inventory was $21,000,000 at the end of the quarter, down from $25,000,000 at the end of the prior quarter. This represents 10 quarters of inventory balance improvement and is the lowest inventory level since going public in 2021. As we continue to sell the connected bike inventory, we will settle in this range of inventory value, which is primarily comprised of nutrition supplements.

Speaker 3

Our content in tech CapEx was in line with the prior quarter at $4,000,000 and 28% below the prior year Q1. The lower CapEx profile is already showing in both our improved gross margins and our improved cash flows. We measure free cash flows as our cash generated from operations less PP and E CapEx, which equates to $7,000,000 in the Q1. This is a tremendous improvement versus minus $10,000,000 in the prior quarter and minus $11,000,000 in Q1 of 2023. This is the 1st positive free cash flow quarter since going public in 2021.

Speaker 3

Our debt balance was $25,000,000 at March 31. We have paid down half the debt since the original borrowing in 2022. Lastly, turning to our outlook for the Q2, we expect the 2nd quarter revenues to be in the range of $103,000,000 to $113,000,000 We expect a net loss in the range of $20,000,000 to $14,000,000 and an adjusted EBITDA in the range of minus $3,000,000 to positive 3,000,000 dollars Our guidance assumes seasonality, which typically results in lower level of revenues in Q2 versus Q1, ongoing turnaround initiatives being implemented and higher expenses associated with our annual summit event. With that said, we announced several major milestones today and look forward to providing further updates over the coming quarters. I will now ask the operator to open it up for questions.

Operator

Absolutely. We will now begin the Q and A session. Our first question today comes from George Kelly with ROTH MKM. Please proceed.

Speaker 5

Hey, everyone. Thanks for taking my questions. So maybe I'll start on the Nutrition business. I'm curious, you showed nice sequential growth there. And I'm just curious, what drove that?

Speaker 5

Was that Amicin? Or is there something else that was meaningful in that sequential improvement?

Speaker 3

Hey, George, this is Mark with Matthew on. Yes, it's I would say it's a mix of things. 1, it is definitely early green shoots of our turnaround happening in Nutrition. Some things to note there is in addition to better volume of orders, there was also the discount that went from 25% to 20%, which effectively increases revenue. And then also there's some earned events because that line is called nutrition and other.

Speaker 3

But overall, George, I would say, it's the early green shoots of that business starting to turn around, which is good news.

Speaker 5

Okay, that's helpful. Thanks. And then second topic I wanted to cover is on some of the new growth initiatives that you spent time discussing. Specifically, I was hoping you could share a little bit more about what you've seen in the month since you launched the entitlement campaign? And then secondly, if you could cover Carl, I know you mentioned that the reactivation campaign is taking a bit longer than you hoped.

Speaker 5

I'm just curious why that hasn't been more successful?

Speaker 4

Yes. Thanks, George. So the entitlement campaign is happening in stages. So it launched literally last week of March. So it's just ramping up.

Speaker 4

So it's a balance between marketing subscriptions and marketing specific programs that solve a specific problem. So as we've always done in our 25 years, we're building up the marketing at a ratio of customer acquisition to lifetime value. As that marketing matures and we increase lifetime value, that marketing will scale. So we're really in the early days of that scale as we continue to add new programs available for single program purchase. Each of those will now scale and that will start to compound.

Speaker 4

But it's very early at this in this chapter of selling specific programs. But I will say this is literally what the company has been doing for 25 years when we really came out of the gate selling specific programs on VHS tape and then DVDs. Now we're just doing it digitally. So, very excited about what that means in the coming months, but it's early days on it. In terms of the pace of reactivation, you need to be very careful with can spam laws and regulations to make sure that we're not spamming people.

Speaker 4

So we've got to be just careful with how many emails we send to what cohorts in the prospect list. So what is a very large bucket of emails, we just want to be appropriate so that we're both respecting the recipients of those emails and also being as efficient as possible with those emails so that we're not scorching the database, right? So we're building a relationship with them. And gradually, over time, we expect it to be more and more productive, obviously without the cost of acquisition because we already own the name. Does that help?

Speaker 5

It does. Yes, yes, understood. And then last question for me is on the selling and marketing line. I'm curious, the sequential decline in selling in the absolute amount of selling and marketing dollars spent was pretty modest, less than $1,000,000 compared to 4Q. And so I'm curious if the commission changes, A, are they kind of fully in that 1Q number?

Speaker 5

And B, are you choosing to reinvest some of that savings in other advertising campaigns? And should we expect that going forward that you'll kind of divert some of those savings into other marketing related initiatives?

Speaker 3

So George, this is Mark again, the CFO. So what I'll say is there's cash spend and then there's accounting spend, right. So what happens is at the end of Q4 of last year, we accrued expenses at the old structure, but we benefited from a cash spend profile in Q1, while we were while the deferred cost from the balance sheet was working into the balance sheet. So that's number 1 why you didn't see as much of a benefit there as anticipated. Number 2, Q4 is always a quarter where we spend on media just because for seasonality purposes, while Q1 we spend more.

Speaker 3

So that's another factor why it goes up in Q1 over Q2. And then number 3, like I said earlier, part of those part of that 1,000 basis points is going to come in the form of enhanced revenue, about 200 and I'd say about 200 basis points to 2 50 basis points because the discounts are lower, right. So our changes were in many places. So that's where the benefits are coming from. So from a cash standpoint, we're seeing the benefit and you see it in the EBITDA line and you're going to see it kind of profess itself more quarter over quarter.

Speaker 3

I would say on the reinvestment question, that's a good one, George. I would say whatever we reinvest is going to be within our desired P and L structure and our LTV to CAC discipline.

Speaker 2

Yes. Mark, it's Mark Goldstein. George, just to add on to that, given that we are still in turnaround mode and we are absolutely driving, obviously, we've had 2 consecutive quarters of adjusted EBITDA and positive free cash flow. We're really not in reinvestment mode. We will be, but that's not really where we are right now.

Speaker 2

Right now, it's we're trying to run a very profitable company with a radically revised cost structure and we're vigilant about our ROIC numbers that we use in our marketing. So we have allowables or thresholds that we will spend up to beyond which we don't get the ROI yield that we're looking for, so we curtail spending beyond that. So when we've fully turn the company around, we will be in a position where we can do more investment spending and elongate the horizon for the return on the invested capital. But right now in the middle of a turnaround, that's not what you'd want to do.

Speaker 5

Got you. That's all I had.

Speaker 2

Thank you. Thank you, George.

Operator

Our next question today comes from Jonathan Komp with Bayard. Please proceed.

Speaker 6

Yes. Hi, good afternoon. Hi, sweetie. And just one question about the progression quarterly that you see. Are you expecting to stay above $100,000,000 of revenue in the Q3 Q4?

Speaker 6

And if so, could you share by how much?

Speaker 3

Hey, John. Good to talk to you. We're not giving guidance beyond Q2. As you know, we detailed a whole bunch of initiatives and we're in the middle of the turnaround. As these initiatives start bearing more fruit, you will see that percolate into the revenue line and you'll see the revenue line go in a different direction.

Speaker 6

Okay. And just to follow-up, given typical seasonality, I'm just trying to understand how much flexibility and time you may have for those initiatives to take hold. So could you maybe just share more detail on the nature of the covenants that you have? And if those initiatives did take longer to take hold, what options you would have with the balance sheet?

Speaker 2

I mean, essentially, I think we've disclosed it we have disclosed it publicly. Our revenue covenant is $100,000,000 a quarter between now and the end of the year. So if you look at our seasonality, obviously, you can see our previous year's recording, Q1 typically indexes up probably about 112 ish or thereabouts. And then Q2 and Q3 are more around a 100 index level. So we planned our initiatives, as you know, they're somewhat back loaded in the second half of the year.

Speaker 2

The seasonality swings are not really that dramatic, so they don't really affect us that much. And so our goal is to have them start to take effect in the second half of the year and into Q1. And the $100,000,000 a quarter revenue covenant was established mutually between us and Blue Torch and everybody felt comfortable with that.

Speaker 6

Okay, understood. Thank you. And then just one more follow-up. As we think about the digital business, can you give any insights, any line of sight you may have to the membership stabilizing or where they may start to stabilize? And as you think about measuring the success and the initiatives you have in place for the digital business specifically, what are you looking for in terms of the milestones or the key metrics to get comfortable in the direction that you're headed?

Speaker 6

Thanks again.

Speaker 2

I think part of this is we might want to focus on is the fact that we're trying to broaden the aperture of the customer base of the company. The company has been, as you know, hyper focused over the last 5, 6 years on subscriptions. If you go back to the halcyon days of the Beachbody company, it was almost entirely purchasing individual programs, what we call entitlements. So what we're now trying to do is to have a mix, where we still obviously are focused on the subscription business, but we believe we're leaving a lot of money on the table and we're leaving a lot of satisfied potential customers off the grid by not offering individual programs. Might there be some level of cannibalization with regard to entitlements to subscription?

Speaker 2

It's possible. But in the end of the day, if our total engagement base, which is subscription plus entitlement is larger as a result, and therefore the company would have more revenue and obviously be more profitable, then that absolutely plays into our core strategy. So we're going to learn more as we go down the process. We just started this. When we talk to you in Q3 and Q4, when we've been at this for 4 or 6 months, we'll have a better idea of where things settle out.

Speaker 2

But the goal here all along was to widen the overall aperture of appeal of this company and its fabulous library of well known programs. And for the last 4 to 6 years, I would say we really haven't been maximizing that because we've been hell bent on the subscription business as the sole source. Does that make sense? John, are you there?

Speaker 6

Yes. No, I think the nature of the question, we're just trying to understand. I mean, 1,200,000 digital subscribers is down significantly from the peak and not necessarily showing signs of normal seasonality or stabilization. So it's hard to get a handle on the efforts that you just walked through paying off versus the pressure still on the core subscription business?

Speaker 4

I would say Well, I think yes, Karl? Yes. I would say that the frankly, we're in a better position than I feel we've been for 2 decades because we never had the digital subscription business as a complement to the front end program sales. So now that we are basically unleashing the single digital purchase component of this with the prospect of upselling the digital subscription and upselling the deep nutritional supplement catalog, we're in a position now to dramatically increase our new customer acquisition at a higher lifetime value because I've got more SKUs to offer them than we've ever had in the history of the business. So really, if you look at it, from a learn test and learn perspective, we've got more levers in our arsenal to build lifetime value, which of course contributes to what you can spend on the front end.

Speaker 4

So frankly, since we've made the transition, over the last 18 months by consolidating our digital subscription business into 1 higher value subscription. Remember, we went through these multiple stages of reducing the number of subscription tiers that we've had and settled in at this higher price. Now we can open up the, as Mark said, the aperture of the front end acquisition using digital program purchases. And then on the back end, sell the subscription. So we think these two things are going to complement each other and frankly help keep the subscription base quite stable.

Speaker 2

And the other thing is, you might note John, because of the pricing that we've got on the digital program purchases, we'll be able to put together a nutritional bundle with our digital program and nutrition that will give us some absolute price flexibility to make it a more attractive lower priced entry point potentially. And then we will provide a migration path for those people who purchase the entitlement to either migrate to a full digital subscription or clearly to the nutritional subscription because they will be getting a portion of the nutrition as part of their digital bundle when they join. So we're really going back to the things that work the best for the company several years ago with those things that we know work today. And of course, this is all dependent on the size and the nature of our digital selling organization as well as what we'll be augmenting that with our direct to consumer direct response system.

Speaker 6

Okay, very well. Thanks for all the color.

Speaker 2

Thank you, John. Our

Operator

next question today comes from Susan Anderson with Canaccord. Please proceed.

Speaker 7

Hi, thanks for taking my question. Nice job on the quarter. I was wondering maybe just, I guess, on the Amazon details. It sounds like the start there has been pretty successful. You sound pleased with that.

Speaker 7

I guess, does that give you confidence in expanding into other retailers or other channels? And then also, I'm curious if any of those Amazon customers, it may be a little early, but if they eventually migrate to your own site? Thanks.

Speaker 4

Thanks, Susan. Yes, we do expect the Amazon business to continue to grow and we're also getting interest in terms of the possibility of expanding sales channels. What matters to us is that the sales that the channels that we go into continue to contribute to the cash flow and profitability of the business. So that's how we measure any opportunities that we're looking at and there are plenty of them because of the quality of the supplement catalog that we've got. In terms of those customers from Amazon coming over to the mothership, if you will.

Speaker 4

I think it will happen in some cases, but you just can't beat the convenience for people who want to shop from Amazon. They get to shop from Amazon and we probably would have never gotten them because they appreciate the convenience of being over there. So as long as we're managing our contribution margin of each transaction, we're sort of agnostic to where they come from. However, the good news is that the brand that goes along with every transaction is Body and the Beachbody company. So if they do any search for who's this Shakeology from, for instance, they're gonna find the parent company and have the opportunity to come in and, for instance, start a free membership of body previews where they can get access to a 130 programs to decide what what they'd like to, have complement their supplement choice.

Speaker 4

So we do think there's going to be some cross collateralization, but that's not necessarily the strategy there.

Speaker 2

And Susan, I'm sure you heard this in I'm sure you heard this in Carl's prepared remarks that, our Amazon business went up 50% both sequentially and year over year, granted it was a smaller base, but it's great. And the other thing is you asked about other retailers. I mean, look, if the traction holds up the way we think it will, with the appeal of our products and moving them outside of just selling them internally, you will see us potentially look at other retail outlets in addition to Amazon because this is a huge category, it's a big TAM and we've got superior products. So we're looking at pricing, package serving sizes, you name it. We're looking at all those things so we can maximize of our nutritional business and Amazon

Speaker 3

is the first leg of that.

Speaker 7

Okay, great. Looking forward to the additional details there. Maybe also I may have missed this, but did you parcel out the buckets of the expense savings this quarter? Like for example, how much was due to the change in commission structure, etcetera?

Speaker 3

Hi, Susan. This is Mark. Listen, we're on track this year to achieve $250,000,000 of savings. Dollars 200,000,000 of that is reducing our overall operating and capital expenditures and $50,000,000 is from our improved sales and marketing. So that's a 1,000 basis points.

Speaker 3

Some of it may come in a bit of enhanced revenue, some of it in lower sales and marketing as a percentage of revenue, But net net, that should deliver 1,000 basis points to EBITDA this year.

Speaker 7

Okay, great. And then I guess last question for me. Did you give an update on the subscriber reactivation campaign? Just curious how that's going and then any uptick that, you've seen there? And then also, I'm just curious in the difference in marketing spend to try and get those customers back than you would, I guess, just normally spend to acquire a customer?

Speaker 4

As we mentioned, the reactivation campaign is slower than expected because we got to be careful not to violate CAN SPAM regulations. However, we do see it to be ongoing. It's an ongoing productive channel, just hasn't hit the scale that we expect. The good news is that it doesn't really have any cost of acquisition at all because we already own the names with the exception of just the effort to put email campaigns together and or any discounts or promotions that we put in place to reactivate those customers. And we have seen those be pretty prolific for us and effective based on results in the Q1.

Speaker 4

So we continue to expand the reactivation campaign. And in fact, with the new leadership that we put in place, we have they started to do a really good job of what we would call a fast follow. So somebody who cancels or doesn't renew their membership, the team is contacting them very quickly where you have the best window, the best opportunity to keep that customer from actually going back into the prospect list. So they're all over it. It's just slower than expected.

Speaker 2

Susan, I'd like to add to that. I just want to add an interesting data point. As we're sort of getting up to speed with this CRM recapture program, most of the things that we've been doing and that we've been testing have been digital fitness, as you can imagine. An interesting anecdote to that is that we have over $1,000,000,000 of former body nutritional supplement users in that CRM base. So if you looked at the CRM base, there's been over $1,000,000,000 of nutritional supplement purchases from Body previously represented by that group.

Speaker 2

We have not up to this point attempted to remarket to them nutritional products ironically, even though there is a reservoir of $1,000,000,000 plus of former revenue there. So as part of the new management that we brought in that group and our focus as we scrub this list and keep ourselves off of the spam list, so to speak, having run one of the largest ISPs in the world, I'm uniquely confident that we'll avoid that. But there is a huge opportunity down the road here to recapture a lot of these people with what we're looking at in nutrition in terms of package sizing, pricing, etcetera, that we could go back to those people with a very compelling offer. So just stay tuned on that in the second half of the year. I think you'll see some stuff there that will impress you.

Speaker 7

Okay, great. Thanks. That sounds good. Thanks so much for all the details. Good luck the rest of the year.

Speaker 2

Thank you. Thank you, Susan. Thanks.

Operator

Our next question comes from B. J. Cook with Singular Research. Please proceed.

Speaker 8

Hey guys, thanks for taking my call. You talked real briefly about partnerships and announced one here about a week ago or so. Can you give us some I guess shed some light on that partnership and maybe what your strategy is there? Would you expect to be promoting those partnerships on your side and on the partner side? And would you expect that to be meaningful to revenue near term or long term?

Speaker 4

Yes. Thanks, Vijay. The partnership that you're referring to with Doctor. B to allow our customers and subscribers to get reimbursement through their HSA and FSA accounts should be a meaningful contributor to help customers or people who might be on the fence about subscribing to a service like that now can realize that they can get reimbursed for it. And we actually have quite a solid pipeline of potential partnerships, particularly interesting with the advent of single digital program purchases versus a subscription offer.

Speaker 4

I'm not at liberty to make any announcements right now. We're hoping to in the next several weeks. But this is part of the reason that the overall platform of solutions both from a fitness perspective and nutrition perspective fits so perfectly in the current environment where you've got GLP-one and other pharmaceuticals for weight loss, but lifestyle is still the primary and important decision that people make to complement those decisions. That is a perfect scenario for partnership because it helps people succeed with those products. There's certainly a lot of demand for them, but lifestyle is going to have to be a part of it and we offer the most cost effective and proven solution for that.

Speaker 4

So we do think we're going to have some good announcements in the near future and we think it's going to be a decent contributor to the 2024 scenario.

Speaker 8

Fantastic. Appreciate it. You touched on the Q2 guidance here. So just quickly, I guess the midpoint is down and so is it and so it would be sequentially as well. Could you just touch on how much of it just seasonality and also other factors?

Speaker 3

Hi, Vijay. This is Mark Sudan. Yes, there's 3 factors contributing to this. 1 is obviously seasonality. If you look at prior years, similar midpoint occurred quarter over quarter.

Speaker 3

Number 2, we did say we're heavily focused on balance sheet fortification. So we're looking at improving our liquidity so that before we get back into investment mode to drive growth. And number 3, listen, we've detailed out quite a few initiatives that are going to drive some healthy new revenues, but these initiatives just take time to implement, right? And that's why we created a cost structure that gives us the runway to implement our initiatives.

Speaker 2

But it's also this is Mark Olson. It's also really important, Vijay, to keep in mind because, yes, we've had 2 consecutive quarters of positive adjusted EBITDA. Yes, we have the free cash flow positive in this quarter, but we're still in the turnaround. I mean, we're ahead of the schedule where we thought we'd be, but we're still in the maximize the balance sheet, maximize expense efficiency mode. We have these programs in the pipeline and they will start to come to 4 in the second half of the year, Q3 Q4.

Speaker 2

But just keep in mind the fact that while we've been successful and we're thrilled with where we are, we're still in the turnaround. And so we are going to continue to manage it that way as we move towards the second half of the year.

Speaker 8

Fantastic. Thanks guys. Appreciate it.

Speaker 2

Thank you, BJ.

Operator

Thank you all for your questions. That will be all the questions we have in queue currently. So I will pass the conference back over to Carl for any closing remarks.

Speaker 4

Great. Yes, thanks so much. I'll just close by saying I'm so excited about our progress and what we've been learning about our current customer needs and our ability now to respond with exactly what they're looking for, thanks to the launch of single digital program purchases, plus special digital subscription offers and these refined supplement marketing bundles that Mark is talking about. I feel like we're frankly back to our wheelhouse that served the company so well for the last 25 years. And just extremely grateful to our stakeholders and to the team for all the support of our long term objective of sustained profitability and helping more people achieve their goals and lead healthy fulfilling lives.

Speaker 4

Thanks for joining us and we'll talk to you next quarter.

Operator

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.

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Key Takeaways

  • Beachbody delivered Q1 revenue of $120 million, surpassing the midpoint of guidance and marking the first quarter-over-quarter growth since Q4 2021.
  • The company reported positive adjusted EBITDA for the second consecutive quarter (its highest since the 2021 IPO) and achieved its first free-cash-flow-positive quarter since 2020.
  • Beachbody strengthened its balance sheet by reducing debt from $50 million to $25 million via a sale-leaseback and divestiture, ending Q1 with a $14 million net cash position and amended loan covenants lowering revenue thresholds.
  • Management has cut the breakeven revenue threshold from over $900 million in 2022 to under $500 million in 2024, is on track for $250 million in annual cost savings, and has built significant operating leverage into its P&L.
  • Growth initiatives include a new digital program store for one-off purchases, expanded nutrition distribution (including a 50% sequential lift on Amazon), and targeted customer reactivation and partnerships to drive future top-line gains.
AI Generated. May Contain Errors.
Earnings Conference Call
Beachbody Q1 2024
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