Q2 2019 Earnings Call
Please standby.
Good afternoon, everyone and thank you for participating in today's conference call to discuss Gaia Incorporated's financial results for the second quarter ended June June Thirtyth 2019.
Joining us today are guy as CEO , Jirka, rysavy, and CFO Paul to ROE.
Following some prepared remarks, we will open the call for your questions.
Before we get started however, I would like to take a minute to read the safe Harbor language.
The following constitutes the safe Harbor statement under the private Securities Litigation Reform Act of 1995.
The matters discussed today.
Include forward looking statements that involve numerous assumptions risks and uncertainties. These include but are not limited to general business conditions historical losses.
Competition.
Changing consumer preferences.
Subscriber costs and retention rates.
Acquisitions, and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q .
Gaia assumes no obligation to publicly update or revise any forward looking statements.
With that I would now like to turn the call over to Guy as CEO Yorker Rysavy. Please go ahead.
Thank you Kerry and good afternoon, everyone.
Revenue in the second quarter increased 32% to 30 13.2 million from 10 point Onemillion in a year ago on five or 82000 subscribers, which is a 26% increase from 463000 a year ago.
We increased the ratio between the subscribers lifetime value of CRISPR to acquire a subscriber to Sri to one.
From two to one during the loss.
To the same quarter last year in Sri to one during the previous quarter.
During the last six months here and you show negative EBITDA margin from 75% to 12%.
And expect to reach positive EBITDA as plan and over the next months.
One approximately five or 90 to 600000 subscribers.
Reaching positive EBITDA by end of September .
We will allow us to grow in mid 20% range in the third and fourth quarter and low Thirtys next year.
In June we successfully completed our first slide event and the gas here on our campus.
Our soft launch in June exceeded their work everyone expectation.
Hum.
You will do some final tweaking the sour second event in August .
And also start really add to the marketing of our $299 life talks to subscription.
Well first for living capacity of October .
The seats are already sold out.
Even even though we have increased the ticket price to 700 to $900 range.
In June we acquired a small video streaming service focus an alternative healing gun healthy eating.
To boost the content offering for our newer segments the alternative healing.
So you are in a friendly discussion for several years and the valuation finally came to attractive ranch.
It's also help us balance to impact will tell churn from our high percentage of new members to be acquired your income our 65% gross period.
Rather than spending an additional about $2 million on marketing in the quarter.
As I say, we expect to reach positive EBITDA, but I know the next months.
And we also expect to get to positive income and free cash flow in July .
At the end of June we have 17, and a half million in cash and I will let Paul right now to speak more about our results.
Thanks for your color.
Revenues in the second quarter increased 32% to 13.2 million compared to the year ago quarter due to subscriber growth of 26% over the same period ending the quarter with 582200 paying subscribers.
The effect of our price increase for new monthly subscribers to $11.99 and January helped lift the average revenue per sub to $7.67 in the second quarter compared to the roughly $7.50 range. We ran for the prior three quarters.
As a reminder, existing monthly subscribers prior to the price change are grandfathered in at their current pricing of $9 or 95 cents a month until their first renewal in January 2020.
Gross profit in the first quarter increased to 11.4 million from 8.7 million in the year ago quarter with a slight decrease in gross margins to 86.4% compared to 87.1% in the year ago quarter.
The decrease is primarily driven by increased content amortization due to our increase in content spending over the past few quarters.
This increase includes content that has been created with the new host we have attracted to our platform with our lives Guy is fear offering.
As part of the agreement to host a weekend seminar you chose is also producing an episodic series that will be available to all subscribers.
We intend to utilize this new content to attract new and existing subscribers to upgrade to our $299 live access annual membership or attending an event in person.
With the content slate coming in the second half of the year, we expect gross margins to maintain at this level for the remainder of the year.
[noise] with the soft launch of the Guy a sphere in June we limited tickets to a 125 people to ensure a smooth inaugural event.
We received great Pete feedback from attendees both on their experience during the event and Guy overall.
We have incorporated learnings from this event and are preparing for our next event, which will be August 16th through the 18th.
We were planning on a slightly larger audience for this event as we continue to test seating configurations.
Our first full capacity event will be in October and as you mentioned is already sold out.
The only way for additional people to access this content will be with a live access annual subscription.
Operating expenses, excluding marketing and subscriber acquisition costs in the first quarter were 6.7 million.
Be slowed hiring in 2019, given our focus on EBITDA profitability by the end of September .
Our gross profit per employee has maintained at $313000 for Q2, which is consistent with Q1 of 2019, but is up significantly from 254000 dollar level in Q2 2018.
Total subscriber acquisition costs were 7.5 million or 57% of revenues.
This is down significantly from 125% and a 120% in the third and fourth quarters of 2018, respectively.
We have continued our focus on adding higher lifetime value subscribers, which represented over 80% of the subscriber additions for the fourth quarter in a row.
As you work in mentioned, we've been focusing on increasing our target LTV to CAC ratio. This year with our target of three and a half to one being achieved a quarter early bringing the average C.J. down for the quarter to $77.
The impact of losses from our 65% plus growth periods on 2019.
He has been slightly larger than we originally projected but we're starting to see improvements in the monthly retention of these cohorts as they continue to mature and tenure.
Is your can mentioned, we completed a small acquisition in June .
We acquired approximately 40000 paying subscribers from FMTV.
Over 35% of the subscribers have already reached the critical subscriber tenure of two plus years.
These subscribers will now have access to a significantly more robust content catalog and product experience.
By adding these seasons subscribers and at this time, we were able to reduce the amount of cash spent on marketing to add new subscribers in the second as well as the third quarters as you work I mentioned.
We continue to build on our member driven growth focus and have begun releasing new sharing functionality to our existing members as part of bringing our member referral program up to scale.
Well this it started from a relatively small number the impact of these new sharing features has shown meaningful improvements in engagement and conversion.
We expect this program to help further reduce EPA and increase engagement going into Q3 and beyond.
Combined with the new content lineup from our new talent and our live access offering we expect to be able to bring average revenue per subs up meaningfully over the next 12 to 18 months with modest modest increases in the absolute dollars, we allocate the subscriber acquisition costs.
This will allow us to continue to build on the cash flow generation power of this model lower subscribers than we originally expected.
We've made meaningful progress on our path to becoming EBITDA positive over the past six months, reducing our EBITDA margins from negative 75% in the fourth quarter of 2018 to negative 12% in the second quarter of 2019.
We are well on our way to crossing over to sustainable positive EBITDA by the end of the September which is anticipated a subscriber level of 590000 to 600000.
With our negative working capital model once we achieve positive EBITDA, we will be able to start generating cash flows from operations.
We will get a further cash flow lift in January when our subscribers grandfathered at the legacy pricing for new at the new rate.
We expect cash utilization to significantly reduce in the fourth quarter of 2019 and that the first half of 2020 and expect to begin generating fee free cash flows as we enter the second half of 2020.
With our current cash balance of 17.5 million.
Continued discipline on expense management, the moderation of losses from our subscriber cohorts acquired during the higher growth periods.
And the early traction from live access we are comfortable with our ability to get to sustain free cash flows with 30% revenue growth with our current liquidity.
With that I would like to open the call up for questions.
Operator.
Thank you very much if you'd like to ask a question on todays call. Please press star one on your telephone keypad, if you're listening today using a speakerphone.
Please pick up your handset before pressing the course money digits.
Once again, please press star one at this time, if you have a question.
And well take our first question from Mark Argento with Lake Street Capital markets. Please go ahead.
Yeah, Hi, guys. Good afternoon, I'm, just wanted to drill down a little bit on the EBITDA positive and cash flow positive. So Paul could you just again, just kind of walk us through what are some of the key levers you're pushing in Poland in terms of being able to get the EBITDA positive here by the end of the month.
And then from a total free cash flow perspective, Yeah, maybe talk about what free cash flow positive looks like relative to you know cap back your capital spend but again for content or develop it ended alive access programming.
Yeah.
Cool. Thanks marks yeah. So just to clarify it's by the end of September that we're shooting to get to EBITDA.
Positive the biggest lever that we've pulled obviously has been the marketing spend and what we're allocating to to drive growth as you work alluded to in his prepared remarks that the growth rate that we're going to be able to sustain into the second half of the year's a little lower than we originally expected, but that's because we're focusing on the discipline of giving getting to EBITDA profitability.
The second big lever that isn't really a lever it's more of a natural rate of changes as we've slowed the growth rate down the need for growing our employee base has also reduced so we are able to to cane contain.
Our salary expenses and what the two of those things were able to take you know 80% to 85% of the ramp that we need to get there into account and then the third piece that's coming into the fall will be us adjusting our platform and streaming costs relative to the new subscriber run rates that were at the prior year, we locked in rates for the higher growth periods and so we've been incurring the expenses at that level, but now as we go into the fall with our new subscriber levels were able to take a an additional bite out of our technology costs.
As we look at bridging to EBITDA profitability for Q4.
Yeah, that's all been in years, where we are.
Got it.
No yeah yeah.
Obviously, you're doing some pretty decent interest them a lot go live access program in any thought about turning that into more of a subscript you're taking some of that content. It seems like.
Your your subscribers remained thirsty for what your guys are offering so anyway any thoughts on even like a super tier $50 a month offer in or something.
No that's subscription, but maybe up a notch or two.
Well I mean, that's it that's what the intent of the $299 alive access annual subscription has meant to give people access to that content. Both during the weekend events on a live basis, but also then going forward.
And actually on our first event, we mentioned we had 125 people in the audience I think we had about a 98 or 99% conversion of the people that bought a ticket that actually signed up for the subscription offering during that event.
And so thats, how how I originally expected it to go as people would come to the event and then want to sign up.
But now if were going with the incremental slate the.
The content actually starting to stand Alones, we're able to market. The 299 subscription independent of individual events. If market share question is can be starting another high level subscription we have some discussion, but we don't like plastics, we plan to do anything.
That level for Nextility gets the cash flow of free cash flow and a pause and ER positive Ah PML. What do you expect to reach next June or July so our focus will be on there and then as I said, we kind of grow about mid 20, maybe 20% for next quarter, and then kind of low Thirtys next year.
Hi to be able to you know really achieved to goes to both get EBITDA positive in fourth quarter and then.
Positive personnel, they cash flow in the third quarter of next year.
[laughter].
Great and then just one quick follow up with you guys. You know obviously subscription streaming has become immensely popular but seems like the next leg here is AD supported any thoughts on.
Doing some AD supported the program into love better leverage the content that's it for me. Thanks.
We talked about it.
Let me talk about it into case, it's not something would it be kind of would not like to do it today, we do not have to do it to get to positive FPN now so I think as I said, if our first fill the positive fee and now it's obviously an option for the future but for right for this year, we don't plan to do anything on that.
Thank you.
Well take our next question from Eric Wold with B. Riley. Please go ahead.
Thank you good afternoon.
Paul maybe just spend a couple minutes on that or.
Your thoughts on the spending on content you shift the.
Your priority in terms of the type of subscribers and now even you're going more towards alternative healing.
How does that change your spending needs around content and then Q minus what is your plan content standards. This year, then how much that would need to grow next year to support a 30% revenue growth.
Yeah. So I think over the last trailing 12 months, we were roughly at about 8 million spend level on content. We're looking at over the next 12 months somewhere in that $10 million to $11 million range. As we go forward. It's just really about the balance of where were spending that content with the hopes that we have with the live access show. They have all committed to doing at least at 13.
Episode series with Us So we have a lot of new content coming from that that's obviously being subsidized by the live event ticket revenue.
So we'll get a lot of Bang for our Buck with that and then it's just about supplementals filling in the catalog to make sure that we have the pieces of content that we need to bridge all of the existing library of content. That's one of the values of the having the original content. The way that we have it it's not going to go away. So were able to look at viewership and interesting topics and then supplement our content catalog with relatively affordable.
In House productions, and we don't have to go out and spend a ton of money per hour to Turkey compete with everyone else.
But that's really where we're at right now so mark Mark asked a question that I didn't get to it which was what do we need to bridge for the free cash flow. So I think it's really that $10 million to $11 million of content spend that hits the investing side of the PNM is really what we're looking to close the gap on in the first six months of next year before we can start generating cash flows so I like to say for the.
Well says 11 million the way Hawilo care content is far mostly like the out of pocket spend so we don't charge to studios and the camaraderie and the people and certain level, where they on salaries. So you cancelling purchase a number.
Things with studios kind of putting out there for US for example, if you did something for P.B.S.
In the past that you know higher 25, Dollarseight hundred 25000, an hour kind of spend for us it was like more like 50.
Because we own the difference in August .
Upcharge like Netflix wouldn't pay too hotel studio. So I, just kind of say that 11 have to you have to look at that that.
It's probably less than half what wouldn't be you know if you kind of go into market.
And the the episodic commitment over over what period of time on those I produced.
We're actually been filming that as we speak because the intent is to get those series out so that our existing members can get exposed to the talent and then give us a pool to selectively market the tickets and live access subscriptions to so Greg was our first one and we had a lot of content with him. The one that's coming up in August we just launched her show a couple of weeks ago and and the October hosts show should be coming in early September I believe everything would all the people's able to be Oh life, It's already filmed yeah.
This year okay.
And final question for me of the.
You five or 80000 subscribers, how many of those are probably still on that the lower monthly rate.
How many are left at the grandfather grain.
Oh, Yeah, I don't have that number off the top my head Eric I'll have to follow up with you on that one.
Okay. Thanks, guys.
[noise], if I knew that star one if youd like to ask a question on today's call.
And please do not have your phone on mute the floor pricing those students.
Well take our next question from Darren Aftahi with.
Ross Capital Partners. Please go ahead.
Hey, this is dillon on for Derek Thanks for taking my questions first on the acquisition.
Can you sort of.
Differentiate between the acquired subs and how sort of your.
Core Guy a base of subs was was doing in the quarter and then given that you mentioned like 35% of those are passed the key level what are some of your expectations for the remainder remaining it as you go forward.
You know the.
I'm not sure I totally understand the questions, but roughly you know what kind of a sad if you want to stay on of course without doing acquisition, we had to spend about an additional 2 million on the marketing to be on this kind of pace would be kinda reset so.
That's how you when I look at it otherwise if you say what do we actually.
You know I mean, if you look at the value of those subscribers. So I sit today for the new subscribers, we say about three and half to one.
LTV to CAC a for these members which are like.
Third of them is more than two years. So we obviously have a higher value we paid almost exactly what do we pay.
A year ago was actually less than two to one to our current you know TV cpk.
But I'm not sure answering your question I see out in terms of the the Retentions on the acquired subs the the fit of their content library into our content library in the access that those subscribers will not.
We expect them to behave better than what we would get if we just went out and acquired new subscribers because when we know that they already have an affinity for our space and an interest in our content areas.
I don't want to provide specific guidance on what we expect to get from a retention perspective, but this is one of those build versus buy analysis that you're can I have run through over the years and then clearly tipped into the the buy side based on the valuation that we were able to do this deal out.
Yeah. So so this is there a kind of fully what to be called build to buy because we bought let's say about 2% of assets comparable on sheets and subscriber so let's call it six and a half or so.
So it's very small so it's it's clearly.
The acquisition price has to be attractive for us to make sense to do it anywhere discussion we saw actually for.
About three years over time and you know the thing says is change and also got attractiveness of the content and at worst subscribers, where because the launch I'm going to be launched our alternative healing you about a year ago, we had in mind to make this acquisition a one point to boost our content rather than build all be headed before already like 900 titles, but no. They definitely help us to be robust and so we would like to bring to alternative healing kindness at same level us the our channels our segments are.
Got it no. That's helpful. Thank you and then.
Sort of are you seeing anything on the subscriber acquisition cost at all with any sort of price sensitivity given your your price increase or you continue I mean, they continue to be pretty insensitive and.
I mean, given that you've had such strong demand for.
The live events as well just wondering sort of what you're taking there.
Yeah, I think there's two pieces to that question. One is what's the cost of the media that were advertising against and we've seen that.
A increase in cost says, there's more demand for less impressions, but what we've been able to do by bringing the growth rate down it'd be very targeted in the audiences that we're going after so that conversion rate increase that we're able to get because of that target allows us to offset those two things so.
I would say that we haven't seen any meaningful impact in terms of price sensitivity at the lower volume that we're bringing in with the lower growth rate.
Now if we continued going at a higher growth rate I don't know that I would have been able to make that same statement, but it. It has worked out well with the combination of the two for us going into 2019.
We actually did not see the agent Creek.
And we plan to keep probably decreasing is going forward as well same as our LTV increasing because our.
Focusing on higher value subscribers.
[noise].
Thank you.
[noise].
And we'll take our next question from Peter Rabover with Artko capital. Please go ahead.
Hey, guys, Hey, Paul I wanted to ask a question on.
So what percent of your total subscribers right now are in that 3.5 to one LTV and I guess more of like on the color.
I don't know if there was a quantifiable way to do it but.
I know you are you going from a higher growth you know lower LTV to cost of acquisition subscribers to a lower growth higher LTV customers. This year, so you're kind of getting a double whammy. So it was this year. So I was kind of curious what do you could quantify that and how that shakes out in the next 12 months.
Yeah. So I think the first thing is on that basis with which we are doing that calculation. It's actually a blended average of the entire member base based on.
Recent.
History. So it's effectively a weighted average based on all of the factors the tenure of the member base as well as the.
Content vertical that they fall into your can I've actually been talking about how do we make that calculation more approachable and and available to people. So I'd say stay tuned on the mechanics of the calculations a little complex to walk through on the phone.
But in terms of how we expect to increase over time, we're going to get the benefit of two things one the size of the mature subscriber base as they continue to age is going to get bigger and the impact of new subscribers is going to diminish. So in effect, we're increasing the tail part of the retention curve just as a function of time and so we expect that to naturally improve from there and as long as we continue to stay disciplined in how we acquire new subscribers and make sure that they season at the same rate. We should expect to see continued improvement from here independent of anything that we do with pricing.
Well, what do you think the long term run rate about LTV to come up with a new strategy is.
Well I mean to be to actually its oh discussion here internally. So far you know, what let's really b when I kind of get there because we have clearly to actually two things like everything what Paul said, you know whats kind of driving the increase I think the main where do you see is to focusing on higher value subscribers, which you know they were like less than <unk>.
You know a year ago, it's right now about two thirds of their subscribers, so where we will consider high value of close to two thirds me lets go to 60%.
But.
So that's probably the biggest driver there it goes to the LTV is changing also has to be kind of a choir more quality Oh lets a yogi east the yoga LTV increases as well as LTV and that's separate from US really increased price because we still have you know all the people who we had last year, they grandfathers and they will be till Nick first frenulum 2020, which also start to increase LTV or when they started to pay higher price right. So Ah. So we're pretty bullish on that one but same time, we want to also lower our cost per acquisitions. So you know we get two to 3.1 to one actually a quarter earlier than we planned and I would kind of.
We didn't really put any official target to it but I think we would kind of start to.
In Fourq to one range next year, because it's doable.
And so there's definitely quite room in both of those measures.
Okay, and then maybe like another unquantifiable sort of question, but I'd love to get color. So you had the alternative healing a guest channel for about a year. So maybe if you could do you have any idea of how how that's contributed to the overall growth and you know what's been the uptake I guess or the response to that channel and yes. Any color you can give on that would be great.
Well I can tell you it's right now as we spend about 14% our base. So they probably answer some of your questions or you know that's a you know we will slightly was like half of their titles. Even less then we have another thing. So that's why this little acquisition will help us to kinda, because we get more content on that side.
And you know I think we would like.
To be all to have you know segments to kind of be now dear friend, but it's as we go but again, we'll see what the LTV is and it's too early to really calculate LTV was any predictability. So high we would still treat the LTV in that kind of what do we call a Florida alternative healing go on the kind of lower side of the spectrum.
Transformation another side as a week, it's kinda matured LTV kind of increased very nicely.
And so we expect to beat assuming all this alternative healing, but again stuff like that'd be can I can kind of on three year from now.
But.
It's a it's a channel what I think a lot of potential but Ah we didnt have till now quite difficult tend to really push.
Now we do.
Okay, and then started going up you're talking about I just had like one more question.
You know you've been obviously Apis for three to four years of growing customers and.
I'm curious whether you have a.
Kind of a good idea that you could share the metrics of some of your customers like middle class or you know average salary or something that kind of you know you can hang your hat on to just to just to understand what type of customers that you are getting and whether you have you know a better idea of what they are now.
Well I mean, they so different especially as we kind of said you know where the spread geographically.
And so we are generally they have rich.
You know income it's about twice the country leverage there was a U.S. statistics, we don't have yet really tried to run something robust worldwide.
Ah, but generally they print you know I would say they depends the segments they between.
50, and 65% females.
Ah so it's definitely female skewed up but most of the people that most of the stuff. When you pay by credit card is there way doesn't mean to users are but because all the boxes to.
Who pay with your credit card space, unless we do a survey.
And you know we did some statistic you know, how many I'm home and stuff, but I'm not frankly see that.
And the data that you know 12 dollar price, we find that that means significant if they owned a home or not.
Ah so there yeah everything that was probably the only one where do we kind of get then we kind of get the you know range of the age which is pretty spread from about 27 to about 65.
So it's not that much difference is the drops in Europe before 27, no drops off the 65 that'd be planning to actually do a new study for that but so far when we did it was pretty consistent.
Okay, I would say.
On the marketing side, we're definitely seeing interest in the younger demographics, they just would rather watch.
Free content and be exposed to apps and pay for the subscription so but that's that's part of the growth into the future is.
Getting them aware now so that when they are ready to pay for their time now.
They'll be coming off.
Fair enough and then you know can what's been split in your growth from international and domestic has that been pretty consistent or has one then the other one country that just like you know up until when Oh, probably any any any color that would be great.
Yeah, I'd say, obviously, our English offering as much more robust so anything that's English is.
And exceed the other ones from a non U.S. perspective got Australia New Zealand.
The United Kingdom's actually quite interesting with one of our new house to house. The following over there Canada and then in terms of non English Spanish is the area that we have the most robust catalog, but there's also a large demographic of.
Spanish speakers that the price becomes a bit of a blocker for German small library, but I'm very passionate people I mentioned the member referral program, we had one person and Germany that was sharing German content actually drove about 250 people to our site for a very small offering that we had that was German language only we obviously have dropped in subtitled stuff but.
This was around an original German piece of content.
From.
Our topic.
Ah, let's try a new Zealand are Harold Bevis for coffee or if there was any U.S.
I think is a future Germany is probably a German speaking is probably.
You know one of the gross orders will come after you know two theaters the Spanish I think it would be the first like non English.
Oh drivers, but for today, you noted for 30% growth International House kind of there and if you want to nurture it by.
You don't really need any of that to grow 30%.
Got it got it and then I guess, how you know I know you've mentioned the but you know between $17 million in cash plus you have some mortgage on the building and you got 12 months between now and you know yet when you said you expect your free cash flow positive in them.
I assume you're feeling pretty confident that that's enough to get you to that bridge.
Yeah, we can always kinda belief that is they didn't change and it's kinda locked for less than 12 months right now and it because he will make it a big jump in the fourth skew. So it's we have kind of a one quarter of little higher spend enough. So that it's not you would see it from the numbers.
Okay, Great I'm looking forward to it. Thanks, so much for your time, sorry for taking so much of it.
Thanks.
Thanks Peter.
And at this time. This concludes our question and answer session I would now like to turn the call back over to Mr. <unk> for closing remarks.
Well, thank you and thanks, everyone for joining can we look forward to speak with you. When you go to report our third quarter in early November . Thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect at this time. Thank you for your participation.
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