Q3 2022 Gaia Inc Earnings Call
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Good afternoon, everyone and thank you for participating in today's conference call to discuss Gaia incorporated financial results for the third quarter ended September 30th 2022.
Joining us today are guy is C. Oh, Eureka race V and CFO Paul Tarell. Following some prepared remarks, we will open the call for your questions Bill.
Before 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.
The matters discussed today include forward looking statements that involve numerous assumptions risks and uncertainties.
These include but are not limited to general business conditions future losses competition loss of key personnel price changes.
Membership growth brand reputation changing consumer preferences customer acquisition costs member retention rates acquisitions, and other risks and uncertainties detailed from time to time in our filings with the securities and exchange.
Including our reports on Form 10-K and Form 10-Q.
<unk> assumes no obligation to publicly update or revise any forward looking statements.
With that I would now like to turn the call over to Guy is C. E O Yoga race V. Please go ahead Sir.
Thank you and good afternoon, everyone.
Our revenues for the nine months through the year increased six 3% to 62 5 million from $58 7 million.
During the quarter similar to the previous quarter, because it was a challenging market environment and the recur member acquisition part of the year, we pulled back on our marketing spend.
Led to good or was the talos increased departures of members that signed up during call. It looked down in July and part of August causes slightly negative quarterly revenue growths.
For the quarter decreased two 5% to $19 9 million.
And member count to seven.
776000.
The challenging marketing environment is now subsiding, the Covid Lockdown member clean up this year actually put us put our member base to very good place now about half of our direct member base is really that's over two years, where it is.
Member retention is about six times higher than for members. They came during the last 90 days.
This provide us much more favorable mass, Florida near future and it's a very good base for our growth next year.
Despite a challenging microenvironment, we manage excluding the nonrecurring charges to deliver a positive earnings and adjusted EBIT of four one.
1 million, which is a 21% of revenue.
During the last two months our effort in the French market, starting started to bear fruit and we expect the German market to follow later this months.
We also executed a new agreement to launch Guy out on Amazon Mexico.
Guy was also selected to become part of the new Google subscription initiative Youtube Prime time their launch last week.
Which is will be similar like we have an Amazon that.
The price of the offering it's a same.
For a guy.
Ah recently.
How recently, a chief technology independence wherever you're now able to operate our business some guy own hardware infrastructure. They also make it easier for us to introduce introduce an additional monetization of our member base.
Zero, New Gaiam marketplace initiatives, we plan to launch next year.
As a company we have no net debt and the replacement value of the 10000 titles, we fully own and the future future catch lifetime value of a member base is over 300 million.
And Paul is going to talk more about our results go ahead next.
Revenues were down 2% to $19 9 million for the third quarter of 2022, but up 6% to $62 5 million for the nine months ended September 30th 2022.
Gross margins declined slightly to 86, 7% for the quarter compared to 87, 1% for the same period in the prior year.
The slight decrease is primarily due to additional content amortization compared to the previous period.
While our subscriber contraction improved from the prior quarter, we did experience our second sequential quarter of net subscriber loss ending the quarter with 776000 members.
Client and the member base was primarily driven by reduced marketing spend during the quarter because of a challenging marketing environment.
We also experienced elevated cancellations in March through July for members that joined US during the peak COVID-19 periods in 'twenty, and 'twenty and 2021.
While these cancellations began to dissipate in the second half of August the reduced demand during the summer combined with these elevated losses in the first half of the quarter impacted both our revenue and member growth objectives for Q3.
Marketing expenses were $7 million or 35% of revenues during the quarter, which is down from $7 8 million or 39% of revenues in the year ago quarter.
As part of our focus on improving the returns on our advertising spend.
We've begun evaluating the efficacy of our marketing initiatives on one month and three month retention levels not just initial sign of volume in CPA.
While we are implementing this approach it is allowing us to reduce our overall marketing spending as a percentage of revenues to balance our expenses against revenues to ensure we maintain our financial independence.
Our focus remains on attracting high potential lifetime value members to find Gaia and become a member.
The results of this will take some time to be reflected in revenues and cash flows.
Well this is creating some pressure on near term revenues and member numbers. We believe the long term cash flow generation will more than offset the short term impacts.
We've continued to scale up our language marketing efforts and have seen good early traction in both our French and German audiences over the past few months with both audience is growing 20% plus sequentially during the third quarter.
During the third quarter of 2022, selling and operating expenses, excluding marketing and member acquisition costs were $8 6 million or 43% of revenues from.
From $7 7 million or 38% of revenues in the year ago quarter.
Personnel related costs have remained flat year over year with the increase is driven primarily by increased technology related operating expenses.
Tied to our business continuity initiatives that Youre can mentioned to reduce dependence on third party service providers that we completed in the second quarter.
With the initial phase of this project completed we are now beginning to optimize these expenses and expect to reduce them as a percentage of revenues over the next few quarters.
Corporate and G&A expenses were $2 million or 10% of revenues during the quarter, which is up from $1 5 million or 8% of revenues in the year ago quarter.
The increase was primarily related to elevated legal fees.
As you may have seen we disclosed today in our 10-Q that we anticipate a settlement with the SEC that would resolve an ongoing investigation and eliminate these related legal fees.
Under the settlement framework that we've agreed to with the SEC staff.
The company would consent without admitting or denying any findings to an SC to an administrative FCC order that would find that in our April 29th 2019 earnings release and earnings call. We misstated the number of paying members as of March 31 2019.
One guy extended a free month of service to some members, while we were implementing a new billing and subscription management system.
The administrative order also would find that we failed to comply with SEC whistleblower protection requirements. When we terminated an employee and used incorrect language in our form severance agreements with other employees.
Our agreement in principle with the FCC staff would require guy had to pay a $2 million penalty over the course of the year. The anticipated settlement is based on negligence rather than intentional conduct there.
There's no guarantee that the settlement will be finalized and approved but we concluded that our agreement in principle with the SEC staff counsel in favor of disclosing and accruing the anticipate anticipated settlement as a loss contingency.
Just to be clear at the outset, we won't be saying anything more about the SEC matter at this time, we direct you to the disclosure in the 10-Q filed today and we will not be answering any questions about it on this call.
EBITDA was $1 8 million or 9% of revenues in the quarter and marks yet another consecutive quarter of positive EBITDA.
Adjusted EBITDA, which excludes the settlement accrual and share based comp and <unk> expense was $4 1 million or 21% of revenues.
Net loss was $2 million or <unk> 11 per share compared to net income of <unk> 6 million or <unk> <unk> per share in the year ago quarter.
Excluding the impact of the settlement accrual and associated legal fees, we would have had slightly positive earnings for the quarter.
On August 25, 2022 garden Gaia entered into a $10 million revolving credit line facility with Keybanc.
As of September 30th 2022, our cash balance was $10 $8 million.
As a closing note I would like to announce that we launched a new distribution partnership with Youtube last week in connection with their launch of Youtube primetime channels.
This will allow us to seamlessly tap into the large audience that engages with Youtube and Gaia content on a monthly basis.
Is this new service is rolling out to use Youtube consumers. During November we don't expect this to have a meaningful impact on the fourth quarter, but we are excited to be a part of this select group of premium content channels that were invited to be a part of this program.
With that I would like to open the call up for questions operator.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
We will take our first question from the line of Mark Argento with Lake Street. Please go ahead.
New York, Hey, Paul.
Just wanted to dig into the base a little bit 776000.
Actually ended up being a little better than what.
Well, we added our model could you talk a little bit how much kind of a COVID-19 cohort I guess, we'll call. It remains in that sub base.
And maybe if you could drill down a little bit it looks like you saw in the August mid August kind of a you know.
Slowdown in terms of the churn rates are a little bit maybe you could.
Now drill down on that a little bit for us. Please.
Sure. So the main impact was from the annual members that signed up during that time period. So now we've been through two renewals with the initial COVID-19 cohort and one renewal what that spring 2021 cohort. So we're not going to give specific member numbers. You gave you the number that over 50% of.
The member base direct member basis over a year old now through yourself two years old now sorry, so we're starting to get into the stickier retention band and so our field based on looking at those members now is that theyre starting to behave like our regular.
Members that Werent Covid cohorts I don't know that we would draw the distinction any longer.
I think it's kind of the way we kind of tried to always look from all the different reports and different companies in general it's kind of wisdom conclusion for most of the subscription company was that you would lose about half of the people who you get through call. It as basically the additional members or.
Somewhere in that magnitude.
That's kind of when we can look what actually.
We kind of lost between probably you know it started March 'twenty and when to second part of August .
You know you kind of see that there was like 50000 60000 members.
That's subsided actually end.
August pretty much for us.
Like when I kind of look at it week to week right now we actually in a growth period again, but how would the fourth quarter really go but it's clearly subside that trend of the bleeding but.
It was obviously for last six months was difficult to five months, but it's you kind of see it in all the subscription so we.
We've kind of leases.
The under us when Theyre going to really talk about it any COVID-19 related members I think would be back to two real as I kind of said, we have because our member base because of this mature so a lot of people who signed before carve it.
Coming you know a big part over half of our base and we have probably.
Two thirds of people more than one year. So it's much better base to go forward. So we're looking forward to grow next year.
Yeah.
Got it so yeah. So in terms of expectations on the toggles here or just got up and that was in <unk>.
Can start adding jobs it becomes cost effective and I'm, assuming <unk> are coming down so that should become a little.
More favorable.
To acquire a customer of la.
Hi, Dan kind of maintain of course and speed and then hopefully get a little more aggressive next year is that how we should be thinking about it.
Yes, I would say just one clarification on that I wouldn't say that CPM is will be coming down into Q4 with the holiday period in front of us and the election and the election cycle that spend so much money through it but we.
We are seeing better efficacy on our spend so we're able to as I mentioned in my prepared remarks, focusing on one and three month retention, you really start to be able to bifurcate.
New members into high value high potential lifetime value and kind.
The people that are just coming to watch one or two shows and then leaving relatively quickly until we're really starting to focus our marketing efforts on the channels and the campaigns that are attracting the people that behave.
As the higher lifetime Sir.
Segments, do and as I said that'll take a little bit of time to play through but you start to retain a lot more people through 90 days and 180 days. It makes your net growth get easier as you mature through that.
Also in August when we kind of salaries through the carve it things we refocused on our annual subscription so our annual take we kind of increase from 20% to about 30% of your answer to summer.
And obviously that 10% of people who signed for year.
Would really help over first part of next year, because there would be no real departures from it so it's more of a modest.
Anything but.
Because we have several of these favorable part so we kind of believe that what happened it's kind of behind US I think you cited some other subscriptions. They are also getting a better place and start to grow I think it was pretty much from March to <unk>. When this period was for a pretty much I think all subscription.
This is as we look.
Other people who kind of.
Rich to us too to be acquired or something can you kind of see the trend pretty much to everybody. So there was no exception to that then it's we believe it's behind US right now.
Alright, thanks, guys.
Okay.
And we'll take our next question from the line of theory will lead with water Tower Research. Please go ahead.
Yes. Thank you I just had questions on the on.
On the Covid impact, but taking that cover that too.
With you guys. So that's that's great.
You mentioned, the French and the German market growing nicely.
What are those what are those viewers are those members consuming can you give us a bit of flavor and that is it existing content is it strictly a content that comes from that region.
We have obviously, we all are a bigger shows our depth.
It used to just have dialogues, but now in depth to all the content that obviously has much more traction, but we also filmed so we have maybe.
You know 1000 unique members.
Titles would we have in each language.
Some of the magnitude so it's a combination of those and it's you know.
Probably 30% of that content as opposed to drives the value and it's a little different is for example in France than it would be in Germany than it would be in Mexico. So it's regional and also depends we might drive it like we have in France, we have a host whose French for.
Some show.
Did we have a guy who is Argentina and four Spanish so it depends if you launched kind of a new show in the language say in Spanish that really increase the viewership, saying would be true in France in Germany. So we acquire a yoga company content there and so now it's all online so we cannot.
The market that primarily.
Okay.
I find it interesting that you can kind of.
Somewhat extend the value of your content by.
Dumping and so on so that's that's encouraging you mentioned Youtube and Amazon Prime can you remind us.
The arrangement Dale the economy makes it you get a member through to that.
As valuable as a member that you get directly or not quite.
Yes, I won't speak to specifics of the contract language just because those are obviously confidential, but generally when we look at it we take net revenue. So we get our share of the revenue the customer facing prices at the same.
And we have some contractual provisions that allow it to stay that way, but really it's about what's the net revenue and then when we look at it from a operating margin perspective, it's actually slightly better because the customer acquisition costs aren't there.
Or a fraction of what we pay for the direct side and then also theyre doing all of the customer service and technical delivery. So on a gross margin basis or excuse me on a net revenue basis. They are less than our direct customers from an <unk> perspective, but on the operating margin basis in the short term.
Because we don't have the customer acquisition had a cost headwind for them. They are actually better and they helped scale. The audience right. We have over 1 million people engaging with Guy has content on Youtube and this gives us a way to continue to merchandise and market to them without having to leave the Youtube platform and so we look at it as a way to drive some incremental.
Rental demand into our content that we've already paid for.
Okay.
You also mentioned Gaiam marketplace initiatives can you give us a bit more flavor there.
We don't want to talk about it much because we didn't finalize that went away, but if you kind of have already something on our site, but you can look at it like.
You'll take some other online courses and ventures.
And let our customers if they buy chugai I would they would have basically can buy that discount.
For being a member and also guy out literally receive meaningful revenue cut as well.
So, let's say somebody sells something for $500.
And so our customer and a roughly might take 10% discount and if they buy Shaw Guy a guy who can get additional higher dollars.
Net of cost.
Okay, so there'll be there'll be specific products.
Members might purchase through you and there's some type of revenue share with whoever that is correct.
And that's something that just you can look at it next year, yeah. It's like some people say, we going to create a model of this advertising for us.
In a different way because we have a very loyal base. So it's a lot of people ask us for something like this from the vendor side. So we kind of said hey is maybe time to.
Monetize this and it's kind of a benefit for the customers they get they get a discount if they want to purchase yes.
Okay, great. Okay that does it for me thank you very much.
Okay.
Once again, if you would like to ask a question. Please press star one we'll take our next question from the line of Abba Horovitz with Old School. Please go ahead Sir.
Hey, good afternoon, I was wondering if you could outline what the costs would legal costs were in the quarter and you said that should dissipate.
Can you quantify that number.
Yeah.
Roughly about $500000.
And when you round it to the way that we presented so that's why it's when I called it out in my prepared remarks, it's almost exactly the delta between last year's see G&A line and this year see G&A line, because we focus on maintaining as much as possible those expenses as we've continued to evolve.
Okay. So in the Q4 will we see that 500 come back on.
It's hard to say, where obviously, we mentioned that we're in and the stage of discussing the settlement. It's just a matter of when the timing of that comes to Finalization.
There obviously be some some costs related to that but included in that 500 K is our estimate of what we believe will be the wind it down so as long as it's not more than that estimate we should be okay from the incremental expenses perspective.
Do you anticipate any extraordinary costs in Q4 or should assuming the legal goes away is there anything else for the seasonality that is an extraordinary cost in Q4 or should it be very similar to Q3.
Yes.
Unfortunately, I don't have a crystal ball as it relates to regular trend operating expenses it should be very similar but.
But obviously theres a month and a half of the quarter left so I cant say definitively whether something doesn't arise that might cause some future action. So I don't want to commit to anything that I can't really control.
Can you can you release, how October went in terms of the business.
I would say generally Europe kind of hit it on its head we've seen that we're starting to tip from declining member basis to moderate growth, but the election was a pretty strong headwind. When you look at the amount of dollars that were being spent to chase some of those mid term campaigns. So it wasn't a blockbuster.
But it's not declining.
The last week obviously.
Last week was the more heavy marketing for all the election thing and we still manage to grow.
But it wasn't big growth because the marketing is challenging glad we expect that to get a little better but again, we don't know its hard to see but it's definitely a big improvement from December .
Okay Fair enough and just can you talk about how the acquisition is going in terms of integrating it into the company.
Sure Great question and I, there was already a pretty dense in my prepared remarks, so I didn't put anything in there but in September we completed our billing migration. So now we're fully integrated on the billing and subscription management side and now we're focusing our efforts on ramping up our ability to spend.
Grow the yoga specific audience now that the billing migration has been completed.
We've brought in someone who is an industry veteran to help lead that initiative focused primarily on the yoga and the yoga teacher relationships that we have from yoga International's long history and were working to get those reactivated and start pushing us forward into the back half of this year going into next year.
Okay wonderful and any chance you guys I mean, I know, we're in a pretty lousy.
<unk> bear markets for sure.
But the value of the company as you mentioned is $300 million of potential assets here and yet it's trading for a fraction of that I'm wondering I know you're sort of cash constrained right now but is there something is management considering buying stock in the market.
Is this you know is there a way to somehow monetize something here too.
Take out the value, which it seems to be highly depressed at this point.
Yeah.
You're absolutely right then we see that in that $300 million, it's only the content and.
The member base, not counting of real estate and technology and stuff, but it's as.
As far I don't think we can say what do we plan to do but I think if you wait a couple of days you might see.
Yes, I think to be honest with you out of the issue that we had until we were able to disclose this today.
What was obviously that was information that we can use.
To make public.
The moves in the stock so we've been constrained by that.
For a long time, yes part of the other reason why we are moving towards getting to the settlement. So that we can put it behind us.
Okay Fair enough. It was this released in any of your filings that you were being investigated.
Now this is the first time that we've done it because like as I said today it was.
It was tied to an information thats in the 10-Q and you can read more about it but this is the first time, it's out yeah I saw I looked at the 10-Q I saw it in the 10-Q, but I didn't look back at the previous 10-Qs because this started it didn't start now right. It started two years ago.
Yes, there was about the quarter was ending March 30, 192019, but we've got a just yes, we got to make sure we stick to what we said, which is we're not going to answer any questions on it up yes.
Got it okay. Thank you.
Didn't affect any quarter since the since 2009.
I just I I'm, you know, there's certain times, where you see a company and you realize how cheap it is and on liquidation value alone. This thing is worth at least a few times what it is currently in the market is pricing it is and that's just the.
It's something that.
Certainly paying attention to here and I'm wondering why there is no one out there that sees this value and has led this thing drips literally to $2. I was just curious if you have insight into that because it's just so odd in this kind of environment.
Well I don't think we specifically a place to come in much on that but you know theres a lot of the other companies they kind of similar.
<unk>.
No.
We have a good chunk subscriber sooner raku, followed stuck their Easter because it's kind of not that different.
Got you.
And I say something I mean, I think it's hard to speculate on what the Investor appetite is Europe and I, obviously understand that.
Disconnects between the value of the business and the way that the stock is trading Theres a lot of macro factors that are affecting that our focus is really just on continued execution, making sure that we can say financially disciplined so that we're financially sustainable and now that we have the technical independents behind us as well that opens up the aperture for us to do some things.
That we have.
<unk> been a little.
Hesitant to do because of the control that was could be exerted by some of our technology partners.
Over the past few years.
So I'd say, we've been laying the foundation for the future now knowing it's a tough environment.
And we're just continuing to focus on execution.
Okay. Just last thing what can we expect you to be profitable is that the expectation now for Q4 that you should be profitable given that you won't have the a good large chunk of those legal expenses and the fact that it seems you've bought them out on the attrition aspect.
It makes sense to me that you should be profitable.
I would say, yes that is the plan to continue to stay profitable with one caveat that if we see a favorable marketing environment, where we can add efficiently new members that meet our high lifetime value. We don't want to leave that on the table. Because this is one of our best quarters to add subscribers, but the plan is to continue to.
Balance growth with profitability and weather the winter that's in front of us.
But generally a degree as well you know we were profitable for the last several quarters and we don't plan to change it but we can.
Could see some opportunities would open because of the market but.
Short of that the plan is like that so we would like to be.
Basically stay on this thing can it grow without it.
<unk> is generating cash and at least not bleeding one.
Okay, Great guys. Good luck to you guys, both and to all the shareholders.
Thanks Deborah.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Rysavy for closing remarks.
Thank you Carrie and thank everybody for joining and we look forward to speaking with you and we will report our full fiscal year 2022 in early March. Thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation.
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