Q3 2019 Earnings Call
Good day, you're currently on hold for the Guy is financial results for the third quarter ended to September Thirtyth 2019. At this time, we are simply in todays audience and plan B underway and just a couple moment. We thank you for your patience and if you. Please remain on the line.
Please standby we're about to begin.
Good afternoon, everyone and thank you for participating in today's conference call to discuss.
Yes financial results for the third quarter ended September Thirtyth 2019.
Joining us today, our guy as CEO , you're caught rysavy.
CFO Paul to rail.
Following some prepared remarks.
We will open the call for your questions.
While we get started however, I would like to take a minute to read the safe Harbor language.
The following constitutes the safe Harbor statement under the private Securities Litigation Reform Act of 1995.
The matters discussed today includes forward looking statements that installed numerous assumptions risks and uncertainties.
Include but are not limited to general business conditions takes historical losses.
Competition, changing consumer preferences subscriber cost and retention rates acquisitions, and other risk and uncertainties detailed from time to time in our filings with the security in Exchange Commission, including our reports on Form 10-K , and Form 10-Q , Guy, let guy a assumes no obligation.
And to publicly update or revise any forward looking statements.
With that I would now like to turn the call over to Guy is CEO , you're gonna be Saudi. Thank you. Please go ahead.
I think your show and good afternoon, everyone.
Revenue in the third quarter increased 25% to 13.7 million from 10.9 million in a year ago quarter.
We ended the quarter was fiber and 95000 subscribers as planned.
The increase due ratio between the subscriber lifetime value of course to acquire subscriber to for too long.
Earlier than expected.
I think that 2.1 ratio we had during the same quarter last year.
The cost of marketing as percent of revenue discrete decree decreased significantly to 49% of revenue from her 25 person in the same quarter last here.
We successfully completed though first full scale live streaming event in the guys fear on our campus.
And also our 299 dollar life axis subscription currents are ahead of our expectations.
[noise] theory chip positive EBITDA in September 10 months earlier than planned on 25% or revenue gross.
And we plan to upgrade was both positive EBITDA and positive cash flow from operation from now on.
The quarter because of 11.6 million in cash.
Expect to reach positive earnings and free cash flow in July .
Based on your gross rate Oh said about 30%.
Revenue rose in the <unk> for the fourth quarter should be in mid twenties.
In the first quarter next year or high Twentyish, and then and 30% for full year of trying to 20.
And Paul then I'll speak more to the results so great lakes.
Revenues in the third quarter increased 25% to 13.7 million compared to the year ago quarter, ending with 595000 paying members.
Gross profit in the third quarter increased to 11.9 million from 9.6 million in the year ago corridor with a slight decrease in gross margins to 86.8% compared to 87.3% year ago quarter, but up sequentially from 86.4% in the second quarter of 2019.
Noted on our last call. The primary driver of this change is increased content amortization tied to growth in content spending which includes several new series hosted by the marquee talent, we have attracted to our platform with the life guys fear offering.
Speaking of which we've completed our first three live events at the guys fear with great success.
Tober event was sold out with 300 people on the audience at an average ticket price of $750.
We utilized a free our of online viewing on Friday night to drive incremental awareness and interest in the event and capture emails.
Targeted marketing to this audience over the weekend allowed us to convert many of these viewers to active members in our $299 live access plan.
With the current traction exceeding our internal expectations.
Operating expenses, excluding marketing and member acquisition costs in the third quarter were 7.6 million.
Which is up approximately point 9 million from the second quarter of 2019, due primarily to increase depreciation and other expenses related to the guy sphere. Our gross profit per employee increased to 344000 during the quarter, which is up from 273000, a year ago quarter.
Total number acquisition cost were 6.7 million or 49% of revenues, which improved more than 50% from year ago quarter, where we spent 13.6 million or 125% of revenues.
We've been focused on increasing the lifetime value to CPGA ratio this year by both improving lifetime value and reducing ta.
Average SCPA for the quarter was down significantly from $91 in the year ago quarter to $67 in a third quarter of 2019.
As discussed on prior calls number referrals have been a significant focus of our member driven growth initiatives. So I'm excited to announce that we recently released new sharing tools, we have been testing over the past year to the entire member base.
With these tools members can share danya content anywhere via unique link that is active for 24 hours.
In addition to the direct conversion opportunities from the sharing we are also gathering qualified leads that we can communicate with to drive conversion to paying members for a negligible SCPA.
The early traction from the share functionality is encouraging and we expect us to drive increased engagement with our content and support continued improvements in SCPA going forward.
We've made meaningful progress on our path to becoming EBITDA positive during 2019, reducing our EBITDA margins from a negative 75% in the fourth quarter of 2018 to negative 7% for the full third quarter of 2019.
We did achieve our goal of crossing over to sustainable positive EBITDA for the month of September .
This combined with our negative working capital model allowed us to generate positive cash flows from operations for the month of September and reduce our cash flows used in operations for the quarter to point 7 million down from 6.3 million in a year ago quarter.
Effective October 15th 2019, we have returned to a two week free trial and eliminated the 99 cents charge. This is consistent with the pricing model for most content subscription services and brings us in line with consumer expectations.
This will not meaningfully impact revenues, but will impact to the reported number count for the fourth quarter as we will not be including trials and the member base going forward.
Even without counting trial members, we expensed to end the year around 600000 paid members.
For comparison purposes, we had approximately 38000 members in the 99 cents trial period at December 31 2018.
We expect cash utilization to significantly reducing the fourth quarter 2019 and in the first time 2020.
Our current cash balance of 11.6 million disciplined expense management.
Continued improvements in retention.
The early traction from land access we're comfortable with our ability to get to sustain free cash flows in July of 2020 was 30% annual growth with our current liquidity.
With that I would like to open the call up for questions Rochelle.
Thank you the question and answer session will be conducted electronically.
Like to ask a question. Please press star followed by the ticket one if you are using the speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Once again star one hand, we'll pause for just a moment.
And our first question, we'll hear from Eric Wold, if B. Riley.
Thank you good afternoon.
Few questions I guess.
One I guess now do you choose the positive adjusted EBITDA for the Montney temporary reaffirmed that guidance are getting too.
Your positive free cash flow by July can you give us a sense of the kind of the major underlying drivers included in that guidance I guess specifically.
How do you see subscriber acquisition costs, and ER and content spending trending over the next couple of quarters relative to outgrow levels.
Sure. So I'll answer on the customer acquisition costs and I'll hand, it over to your good to talk about content from a customer acquisition perspective, we've settled to having to pretty much the.
Salute dollars that we're willing to spend quarter quarter to quarter. So that's gonna stay relatively flat as we look into next year with revenue continuing to grow so that will increase the EBITDA margins that were able to.
Dropdown at through cash from operations, which will start to be able to offset the investment that we're making in the content.
[noise] right. So you might kind of do something on your side here. So.
He's from your from your side.
Yeah on the content.
We actually increasing content spend about same as revenue about 30%, obviously, we can reach to positive.
Free cash flow, apparently or if he would limit their content spending, but if you don't want to do that I think being a very good trajectory.
What will be the total content spend this year in total.
Capex spend this year than what part of that Capex is not recur in your was due to the build out of the.
That's right.
I don't have the numbers for the full year, but weve guided last call that we're going to be spending about three to 4 million a quarter on content and then probably another.
752 million on the product side of things the non recurring stuff related to the guys fear buildout as.
Oh and rearview mirror at this point.
Okay.
And then.
Lastly on the to 99.
Premium subscription you know what point does that need to.
Get to I guess, one they're going to your meaningfully impact results.
On a positive bases and then probably more importantly, you had started seeing you know consumers gravity towards that plan in or you're going to reduce your kind of spending needs didn't seem gonna revenue growth.
I don't think we need anything per se, but what was interesting about the three events that we've had so far a lot of the people that are signing up for live access.
Our net new members there actually not upgrades. So that's a positive for us in terms of looking at the talent that we're bringing in and their ability to attract new people to.
The Guy in particular this October event. It was unique content, that's not a barrel available anywhere else with the host that's pretty hot right. Now so that drove a lot of awareness, which will be able to capitalize on going into the rest of this.
Here, so there's not any need for a certain penetration rate, we've adjusted our spend levels on customer acquisition costs down to the point, where anything that we get from a conversion to live access is all incremental margin.
I guess, one last one for me and if I.
Where do you know draggers, where when and where they're going to share and I guess you look at the I know you've only had three of until floor. When you look at the combination of those who attended live events as well go to.
You know didnt attended paid up to stream alive.
What percentage of those were completing new members I get a sense is kind of how much. These.
The.
The people, you're bringing into the do live events, you kind of tracking their own.
Followers into a into a into guy.
I think it depends on which talent you're talking about with the three events that we've had a greg with someone that we'd had that was the June event. He someone that's been on the platform for awhile.
So it wasn't so much net new there, but Carolyn and Joe who were the August in October events were predominantly new members upgrading to Gaia are signing up for CGI add that to 99 level.
So it's just going to be event by event basis, but overtime at old as it builds it'll start to be more balanced in terms of upgrades and conversions because we'll have.
A better ability to market the events to members around be event, which is what we see is a good catalyst for conversion is a.
The fear of missing out on the event and using that as a countdown to get people to upgrade.
Sounds good thanks, Paul you're correct.
Yep.
The next summit to Steven Frankel with Daughtery.
Good afternoon, and thank you how many live events or on the calendar for Q4, and then how does that growth through 2020.
We actually purposefully scheduled a pause in the calendar for the rest of this year it'll be picking up a in early next year and what we're looking at now is kind of these marquee ones that we are taking the risk with the talent of incentivizing them to do content with us, but also building what we're calling tier two in tier three events.
Which are people that want to use our space that fit into our guidance content.
Umbrella.
We aren't necessarily funding that all they're paying the costs and then we'll do a rev share on them, so it'll be dynamic overtime, but from the marquee perspective, I believe we have four locked in already with the fits that we're trying to nail down to date on.
Okay.
And then.
As how should we think about sustainable growth rate of subs.
Going forward.
Well I mean, we merely went to focus on revenue because obviously for us to about $300 member. It's more important so if we didnt still hard to project what would it be a ratio of industry I remember.
Compared to others, but so otherwise we will try to.
Focus I said about 30% growth rate for next year, which probably will be somewhere between 20 to 20, plus subs growth by let's say 20, plus subject girls 30 person revenue growth.
Okay, great. Thank you.
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Okay.
The next I'll move on to Mark Argento with Lake Street capital markets.
Hey, good afternoon guys.
<unk>.
Pause in September .
I know you'd mentioned I still think July 2020 on the free cash flow positive how much cash do you think you'll.
Consumed between now and free cash flow.
Hi.
We're not going to provide specific guidance on what that looks like but we will tell you that with getting hard cash used in operations to something million. This quarter that gives us more breathing room as we look at the content investment, but it's important to note that the content investments entirely discretionary based on what we are looking at.
In terms of traction so if we need to pullback for whatever reason, we can there's no contractual commitments that ties to a specific level of spend so we're committed to getting there with the cash that we have on the balance sheet today.
You know to content, it's very dear friend or where do we see Cobra industry. They have no pressure on content can be done also had a really big need to do more content.
He has a plenty the number of titles we have the U.S. libraries, probably almost double of Netflix sense right now so.
And at a party, calling it pressure. So we clearly can lower you know we now are said to be growing content spend about same as revenue 30%.
And we clearly don't have to do that so that's kind of fall. So depends we can easy adjust that for a few million dollars.
More than that and so but even of is the content spend to be should have <unk> adequate cash to get to the positive free cash flow also we reach EBITDA.
Earlier.
Then plan and vis.
The traction or what do we have on our Lifelock says, we don't expect any issues there.
Got it but putting content.
So the side the operating losses should continue to decline you don't see any seasonality in terms of cranking up spend for the holiday quarter or what do you think about the seasonality of the.
Yes.
Yeah, we've actually done a really concerted focus of reducing the need to do that type of.
And on paid media the majority of what we're focusing on in Q4 is either a converting people that.
Were exposed to the events that we had that hadn't sign up for membership and as I mentioned in my prepared remarks really enabling our members to share guy to help contribute to that number of impressions that are out in the world that we're not paying for and that's gonna be a significant difference from what we would have done in the prior to Q4.
Here's where we had to spend media dollars to get that awareness.
So in you know.
And we plan to upgrade positive EBITDA and operating cash flow from now on and as far as free cash flow.
The use of cash will decline every quarter meaningfully so it's the trajectory between now and.
The second Q should be pretty.
Well go down every quarter.
And.
Pivoting a little bit and then you made a small acquisition last quarter or added.
Some subscribers or what do you see in the landscape from an M&A perspective are you actively out looking for.
No more content or subscriber base is out there and how do you see the overall streaming market playing out.
You know this acquisition, we actually track can talk to those people for three years.
And find out debt that was very good complimentary on several scale stays a bunch of small acquisition, we looked at it.
About three years to me it really scope the plan. They I wonder if people are no other small acquisition and available.
However, it's not that we would be afraid you know I did over 300 acquisition in my life, but.
It's not in this model, it's not really really acquiring what do we need to there's clearly bill to buy analysis and you Wanna get some other benefited this acquisition. So we don't plan to acquisition to be any meaningful.
At least for right now and meaningful part of our growth. So when we talk about next year gross rate, it's been kind of assume that's organic.
But you know there can be if you find out <unk> mi can do on acquisition into it but it wouldn't be like condition. We would just kind of replace certain spend by acquisition, so we'll be above or same.
In fact on the cash flows and stuff, but a while there's like a few we can look at.
I think is they kind of they'll be more to establish the international markets then pick something go in U.S., but there is you know SRIO for acquisition and U.S., we can look at but it's not right now in our Hock Tan.
You know discussion even internally.
Thank you.
And as a reminder, star one if you would like to ask a question.
Next we'll move to Deron Apache with Roth capital partners.
Hi, guys. This is doing entre guarantee thanks for taking my question and congrats on your September EBITDA.
So just sort of.
On the organic fraud, with which the traction you're seeing there you talked about some of the tools you've rolled out do you have some additional sort of.
Tools that you're looking forward to help.
And on top of that organic.
The organic growth, you're seeing and is there an incentive for your users at all to send out that 24 hour link or do you plan on some sort of program.
So first of all the all instrument in the reverse order because it's a progression of how we're thinking about rolling it out. So the first thing we wanted to do is be able to give numbers the ability to share guy content. Historically, we had this functionality, but we limited it to a couple of shares a quarter. So we really got a scarcity mindset.
To our member base. So what we've been doing now is rolling out as a basically retraining behavior you can shared as much as you want and incentivizing people will come from identifying people that are good at sharing and getting members to convert and then reaching out to them about bringing them into our ambassador program, where they can actually start to earn money.
The majority of people that are bringing in sub 10 members are just doing it because they want to share guy and get people around that and able to talk about the things that their into and that's enough intrinsic motivation well my teams working on building out progression from people that can get to five to 10, and then help growing from there and we have a couple of piece.
All that we've identified through the sharing program that have become ambassadors that are now into you know well into the hundred member referrals retained member referrals, So where it goes from here is the ability to give a more than just one piece of content something that we're calling member portals, which should be coming out.
Next year early next year is the ability to actually cure rate AG Gaia experienced that you can use as a landing page for people to come to Gaia and experienced the version of it that you want them to experience versus just jumping into the broader library. So those are all coming we'll be doing a scaled roll out of that we've been testing with some of our bigger.
And last year's now to make sure. The functionality is what we want it to be but they can't would be that that could be available for any member into the future and really about building out that community and the where it goes from there from incentives and rewards. We do have some plans, but we're still shaping them. So I don't not ready to comment on that yet, but I would say each quarter from here he should hear some incremental.
We'll improvements in that functionality from our side.
Great. Thank you and then on live event with some of the success you've seen so far do you think that you've optimized sort of the ticket price or do you think that there's some some more upside there.
I think if you took a queue from anything that is a finite number of seats you get a lot better at understanding.
And as you look at pricing so were three events and we've made some improvements there and the average ticket prices come up as a result of that but it's really going to be talent specific in terms of how much demand is there for a given.
Feet, but what we did with this one was there was enough interest in a higher level price point to get preferred seating and to meet injury. So I think it's going to be more about revenue up sell opportunities around the experience.
Versus the ticket price being something that needs to change meaningfully.
No.
Got it. Thank you and then just on the international side, how are things trending there sort of what are you seeing and have views invested it all in any more content translations.
Well internationally as soon as we used to sustainable did part we don't really aggressively market international because there's all these more testing if you go to market. We are Gol was over last.
Nine months six months, especially to get wouldn't be called parity, which means then when you have intronis few subscribe from Germany and your experiences like German.
You know killed before you still have some issues that you can see everything in the German but if you get to email the answer in English or something so to upgrade I just staff. So we have everybody bilingual who deal of is that whose you know a German as they native and so experience for somebody who subscribed from say Europe , it's kind of.
Same as we would operate so there was our main thing.
We kind of slowly growing international we probably as we get cash flow positive people kind of expand more on that side, but for right now it wasn't the main focus for us.
As we kind of focus and everything that to get positive EBITDA, obviously by getting to positive EBITDA now everything kind of relax figure there earlier and the all to sign so very positive from where we had so.
Our main things right now is what do we called member driving growth and that's pretty much over next.
Quarter or two will be the main driving focus for the company.
Thank you.
Okay.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. recently for closing remarks.
Well, thank you very much and thank everyone for joining and we look forward to speaking with you when Vilar report of our annual results in February I think.
[noise], ladies and gentlemen, this does conclude todays teleconference. You may disconnect. Your lines at this time and thank you for your participation.
[laughter].