The Beachbody Company - Q4 2022

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Welcome to The Beachbody Company's fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded. I will now turn the call over to your host, Bruce Williams, Managing Director of ICR Investor Relations. Please go ahead.

Bruce Williams (Managing Director of ICR Investor Relations)

Welcome, everyone, and thank you for joining us for our fourth quarter and full year 2022 earnings call. With me on the call today are Carl Daikeler, Co-founder, Chairman, and Chief Executive Officer of The Beachbody Company, and Marc Suidan, Chief Financial Officer. Following Carl and Marc's prepared remarks, we'll 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. 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 include today's press release.

Today's call will include references to non-GAAP financial measures, such as Adjusted EBITDA. 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 Carl.

Carl Daikeler (Co-Founder, Chairman, and CEO)

Thank you, Bruce. Good afternoon, everyone. Okay. First, let's get caught up. On our last earnings call, we presented our expectations for the fourth quarter and our plan to continue bringing costs in line with the dynamic environment, all while we pursue our significant strategic innovation plans for 2023. I'm pleased to say we delivered fourth quarter revenue in line with our expectations and Adjusted EBITDA that was well ahead of our guidance. 2022 was a demanding year, and I'm proud of what our team achieved despite the challenging economic backdrop and the headwinds faced by our industry. We met or exceeded guidance in all four quarters of 2022. We executed on our One Brand Strategy that we announced exactly a year ago during our 2021 Q4 earnings call.

To put this all in perspective, let me step through the highlights of what we said we would do and the actions we executed in 2022. As you might remember, we made the decision to consolidate the business into one platform to focus capital allocation and centralize all our technology, marketing, and content investments. In July, we initiated the migration of the Openfit platform, content, and subscribers into the Beachbody On Demand platform and began engineering the consolidation of the Beachbody On Demand subscription together with our premium BODi subscription to create one simplified but extremely compelling offer.

I'm proud to report that work was completed on time and under budget just a couple weeks ago. We're now launching the world's first complete Health Esteem platform under the BODi brand with the greatest digital fitness catalog in the business and its stream of compelling new content every month, a full nutrition section with two incredibly popular eating programs and over 1,000 healthy recipes, plus a brand-new positive mindset channel to help our subscribers feel great about themselves in all shapes and sizes. More on what all that means in a minute. Fundamental to all this activity was a thorough approach to taking costs out of the business and formulating a clear roadmap to profitability by focusing on our customers' biggest problems and their wants and needs.

We completed the process of aligning headcount, technology, and production spend with the business plan and reduced our nutrition SKUs and key bundle configurations, known as Total-Solution Packs, from 190 variations down to five, further simplifying and streamlining the business. In 2022, we improved EBITDA and CapEx by $125 million. That's ahead of the $110 million target we promised earlier in the year. We're confident that we're on the path to consistent Adjusted EBITDA profitability by Q4 of 2023. With our 2022 debt raise, we don't foresee any additional need for capital. The business implications of these changes are compelling. This consolidation simplified what our network of BODi Partners offer. We used to call them Team Beachbody coaches. Now we call them partners. This consolidation drastically simplified the array of options BODi Partners offer their prospects.

Now the field can spend less time training their teams and focus more on helping people engage with the platform. That dramatically increases their income opportunity, which should in turn attract more people to sign up to be BODi Partners. On the last call, we also introduced our plan to reposition our company and brand to fill a major void in the industry. We spent 2022 rethinking how to best serve the significant TAM of people who've been left behind by the legacy fitness and diet industry. We're doing what category leaders do. We're expanding the size of the addressable market. To that end, we launched the Health Esteem category. Let me elaborate on this vision before I turn it over to Marc. You have context of this expansion as you get into the specific KPIs from the quarter. I think you'll see we're extremely well-positioned for growth.

What we've learned really since the pandemic, but especially last year, is that the majority of consumers are rejecting the premise of the legacy fitness and nutrition business that runs a playbook convincing prospects that they aren't good enough until they lose the weight or get the six-pack. In fact, we discovered this gap when we had two surprises last year. Of the programs we launched, two of them surpassed our expectations: The 4 Week Gut Protocol and Fire and Flow, both which focus on how you feel while you do the programs versus focusing on the results that you achieve at the end. It became clear to us that our transformation model of P90X and Insanity could be significantly complemented by an ongoing plan that focuses on how people feel today, so they stay engaged in the process and appreciate their sense of well-being along the way.

This represents a significant business opportunity for us because the data is clear that the legacy industry is failing at this. Overall happiness has declined over the last 49 years, while obesity rates and lifestyle diseases have increased. There are 150 million adults in the U.S. that are overweight or obese. That's 74% of adults, and that number is climbing. The legacy industry has concentrated its efforts on convincing prospects of their faults to motivate them to buy, to buy that treadmill or join that gym, and it's primarily retraining the same cohort of people who move from one solution to the next over and over, trying to find happiness. Once we saw this gap in the market, we were quick to organize and expand the platform to serve this new category of Health Esteem.

This is what's been missing from the model, a comprehensive solution that fits with real life, that delivers happiness on day one, not just physical results at the end of a program. What most adults are looking for today is the support to reduce anxiety in their lives, to feel better and to improve their self-esteem. People don't wanna be deprived of the freedom of take days off from training or enjoy the foods they love, bread, for instance. Like, when did food become enemy number one? In fact, as we surfaced this new category, we discovered a bold way to help people get healthy while they still enjoy the foods they love. We actually encourage people to eat more dessert, and that's a whole new category we're moving into with existing products. Back in 1998, when we founded Beachbody, we defined the home fitness category with our content.

We saw a dramatic period of growth when we created the category of Superfood Health shakes. We're now taking everything we learned from the last two decades and our observations since the pandemic and expanding the market by opening it to this holistic new category of Health Esteem. You'll see this materialize in five significant ways. First, as I said, we consolidated our subscription tiers of BOD and BODi into one simplified complete bundle, we call it BODi, for an annual subscription price of $179 or around $15 a month for access to our library of 120 fitness programs or over 8,500 on-demand videos. That services the business model we're best known for and which is the foundation of our revenue model. Second, we've launched an ongoing series of four new workout plans each month called BODi Blocks.

These are new three-week programs starting the first Monday of every month, serving beginners, general overall fitness, lifting, and a specific plan each month for our Connected Bike subscribers. The BODi Block plans are the incremental layer to appeal to the audience that's not project-oriented, like our P90X customers, for instance, but just looking for a cost-efficient and effective alternative to joining a gym or hiring a personal trainer with the flexibility to take time off during the month. Our partners use that monthly cadence of new BODi Blocks to start a new wave of subscribers every month rather than only when a new program is launched, which was the trend of our old model. Third, we've added positive mindset master classes to our platform, and it's a game-changer for retention. This content makes BODi the only platform offering complete fitness, nutrition, and mindset content in one subscription.

These monthly master classes help people manage their mindset, so they overcome obstacles and reduce their anxiety while they work to achieve their overall lifestyle objectives. This month, for instance, we're introducing a master class called Happiness Habits with best-selling author Petra Kolber. You see, gyms or other fitness services just expect members to navigate life's ups and downs and stay consistent, just figure it out, which is unrealistic and obviously leads to higher churn. Our mindset master classes give people the tools to start with a positive mindset that enhances their experience and improves their self-esteem. As we saw from those two feel-good launches last year, when people feel good physically and are feeling good about themselves, that content has incredibly high value to subscribers, and they're less likely to churn.

Okay, fourth, we're also expanding the positioning of Shakeology to not only be the first superfood nutrition shake, but also the world's first superfood dessert, a smart dessert, if you will, with hundreds of recipes that take advantage of the incredible flavor variety of the Shakeology product line. The product is delicious alternative to traditional desserts, and it has incredible health benefits. Healthy desserts fit perfectly into the Health Esteem category and represent a massive new $48 billion market opportunity for BODi. There are tens of millions of people who may not be ready to start one of our fitness or eating plans, but who will absolutely take the logical first step of swapping their normal dessert choice for a superfood dessert that actually helps them lose weight and makes them feel great.

Finally, all of this is driven by the powerful catalyst of changing the name of the platform from Beachbody to BODi, demonstrating our commitment to our network, who feel strongly that the Beachbody name was poorly aligned with our mission and holding them back from expanding their market. I can confidently add that our BODi Partners are extremely enthusiastic about these initiatives, including the name change, the simplicity, the price points, and especially the addition of positive mindset content to the platform. They're engaged and have been promoting aggressively since the March 2 launch. There are also some other important operational improvements we look forward to in 2023, such as simplifying our digital experience by reducing clicks at checkout and adding alternative payment options later this year, such as PayPal and Apple Pay.

These are all powerful changes that are enhancing the productivity of our proven business model, a model which has been consistently successful whenever we innovate our approach to fitness and nutrition based on our observations within our ecosystem. I'm extremely grateful to the teams who believe so passionately in this mission that they delivered on this initiative on an incredibly tight timeline and budget. Our mission is clear, and they're on board. We're determined to help as many people as possible to achieve their goals and lead healthy, fulfilling lives, generating long-term, sustainable, profitable growth and shareholder value. We know we're executing all this in an unpredictable environment, but that's exactly when there's the most room and demand for radical transformation, and BODi is taking the lead. We never stand still.

Let me turn it over to our CFO, Marc Suidan, with the details of the quarter and the full year 2022 results. Marc?

Marc Suidan (CFO)

Thanks, Carl. Good afternoon, everyone. We are pleased with our fourth quarter results, which came in at the high end of our expectations. Fourth quarter revenue exceeded the midpoint of our guidance. Adjusted EBITDA was $3.5 million compared to a loss of $26.6 million in the prior year period. Notably, our fourth quarter results are a substantial improvement towards attaining a goal of generating profitable Adjusted EBITDA on a recurring quarterly basis by the end of 2023. The actions that we implemented in 2022, coupled with our new Health Esteem initiatives, set the stage for sustainable revenue growth. On our third quarter call, we discussed our strategic initiatives relating to pricing, nutrition, and cost reduction. Let me give an update on these three initiatives.

With regards to pricing and building on what Carl just shared, we introduced the new BODi pricing in September 2022. We adjusted the BODi Premium app to $179 annually from $298, and as of this month, you can only subscribe or renew on the BODi Premium app. As a reminder, the majority of our existing subscribers are on BOD only, the basic library of all our programs at $120. Since we launched the new BODi pricing in September, our BODi subscriber file size has been growing in a healthy way. While our overall digital subscriber base in Q4 contracted, BODi is growing. Additionally, we are finding that BODi subscribers have a much higher nutritional attach rate.

These measures validate our vision of creating a higher value customer that is more engaged across our entire platform, including fitness, nutrition, and mindset. We expect that the customer lifetime value will be higher because first, we will generate a higher initial As it first steps, our website now positions it very well. When you enter our app, you see fitness, nutrition, and mindset all at the top. This will generate more traffic towards those seeking nutrition engagement. As it relates to our cost structure, we are continuing to gain efficiencies through our simplification initiatives. We have right-sized our cost structure to the current run rate size of the business. As a result, we have reduced our headcount by over 40% to 615 employees since January 2022.

Let me walk through some of our key initiatives and where they stand. We have reduced our per episode cost of production by more than 50%. We completed the first phase of migrating our ERP servers to the cloud. Our SKU rationalization efforts are on track. Marketing continues to focus spend on variable commission partners or strict customer acquisition costs for quick payback. We completed a restructuring this past January, resulting in a further reduction in force. We will continue to capture additional cost savings through disciplined cost management, best practices, and process improvements. Our lower spend can also be evidenced by our year-over-year reduction in payables, accrued expenses and lower capital expenditures. In 2022, CapEx was $46 million versus $109 million in 2021, representing a 58% reduction.

Our CapEx declined dramatically as we consolidated to one technology platform and one production library due to our simplification initiatives. We expect our CapEx will continue at the same level in 2023 as it did in 2022. Turning to our results for the fourth quarter. Total revenue was $148 million, which was 2% higher than the midpoint of our guidance. Digital revenue was $69 million, down 16% versus last year. Digital subscriptions were 1.95 million at the end of the quarter, declining 23% year-over-year. Churn was in line with prior year levels at 29%, while retention improved year-over-year by 30 basis points to 96.8%. Nutrition revenue was $75 million, down 23% year-over-year.

While we were disappointed with this contraction, the actions that we recently implemented, including our focus on superfood healthy dessert, new packaging sizes and offering simplifications should improve our nutritional business in 2023. Connected fitness revenue was $5 million with approximately 3,700 bikes delivered. Our $50 a month bundle for the bike and the BODi subscription continues to be our most popular bike SKU. While it is a great connected fitness deal, we still need to create more awareness of this offering. Starting this month, as more users transition to the BODi app, those subscribers will view the bike workout options, making it easier to market this offering to them. Gross margin was 57% of revenue for the fourth quarter compared to 45% last year.

The gross margin improvement was largely driven by revenue mix, which shifted to less connected fitness revenue in 2022. Let me walk through the gross margin drivers by key product line. Digital gross margin was 77% for the quarter compared to 84% in the prior year period. The decline was primarily related to a smaller subscriber file size. As we regain scale, the production costs will be spread over a larger revenue base, resulting in higher gross margins. Nutrition gross margin was 50% in the fourth quarter of both 2022 and 2021. We are aggressively managing inventory to forecast, which should reduce our exposure to excess write-offs in 2023. With the focus on Shakeology, via healthy dessert and the Shake & Hustle packaging, our nutrition gross margin should improve over time.

The connected fitness gross margin continues to be negative, with some one-time charges flowing through this fourth quarter. We are leveraging our bike studio bundle to drive bike sales without competing in price wars. This ensures that the LTV of the customer remains positive. Importantly, our data shows that bike customers are very engaged in workouts and have a much lower churn rate. Total Q4 operating expenses excluding impairment charges was $114 million, declining 32% year-over-year, reflecting our aggressive cost management and the 40% reduction in headcount from January 1, 2022 to now. Selling and marketing as a percentage of revenue decreased by 11 percentage points from 63% to 52% of revenue for the year. Our selling and marketing costs are primarily driven by partner commissions and bonuses, which are purely variable. They earn these funds based on transactions that they generate.

As for our marketing spend on media, we continue to be very disciplined in managing customer acquisition costs so it delivers a profitable LTV to CAC ratio. For Q4, we reduced G&A by 9% compared to last year as we continue to manage expenses tightly. In Q4, we reduced our technology spend by 42% compared to last year. You can see how our technology spend has been reduced significantly while simultaneously delivering a transformational change in our platform. This has been enabled by focusing our tech spend on one platform. All this contributed to a materially improved Adjusted EBITDA of $3.5 million compared to a loss of $27 million in the fourth quarter of last year. Our new cost structure positions us to generate profitable Adjusted EBITDA on a recurring basis before the end of the year.

Our Q4 Adjusted EBITDA was positive as we intentionally settled our executive annual performance bonuses in equity. We want our executives to be aligned with our focus on profitable growth. Excluding this equity comp add back, Adjusted EBITDA would have been a loss of $2 million, which would have exceeded our guidance range of a loss of -$9 million to -$14 million and representing a 93% improvement over the prior year quarter. With respect to the balance sheet, we ended the quarter with an unrestricted cash balance of $80 million and $41 million of net debt. As previously mentioned, we do not see the need to raise additional capital. The existing debt arrangement has an additional facility of $25 million, which we do not plan on utilizing.

Operating cash flow improved by $168 million year-over-year to -$47 million, representing a 78% improvement. Fixed asset CapEx for 2022 was $26 million compared to $78 million in the prior year, representing a 66% improvement. Net inventory decreased by 20% to $54 million from the prior quarter and has declined by more than 59% since the fourth quarter of 2021. Our discipline of aligning our nutritional demand forecast with our supply-side purchases resulted in both a lower inventory level and less exposure to excess write-offs. Our SKU rationalization reduced in-stock levels of slow-turning items. On the bike front, our new bundle strategy has allowed the company to improve inventory turns, gain very attractive long-term customers, and accelerate our cash conversion as we work through existing inventory.

Now, I'd like to take a moment to discuss our outlook for fiscal 2023 and the first quarter. With regards to revenue, we are guiding Q1 revenues to be in the range of $135 million-$140 million. The first quarter is typically our seasonally strongest period. However, Q1 revenues for 2023 will not follow our normal cadence, given that we just launched our new strategy in offering. We expect to generate sequential revenue growth throughout the year as our initiatives gain traction. With regard to Adjusted EBITDA, we're guiding to a loss of $3 million-$6 million for the first quarter. We expect Adjusted EBITDA to gradually build throughout the year as we begin to fully leverage our cost savings mid-year and see sequential revenue growth.

We will incur lower overall costs and gain efficiencies under our new simplified One Brand operating model. We remain on track to generate recurring and sustainable positive Adjusted EBITDA on a quarterly basis by the end of FY 2023. Next, I will provide color relating to our digital subscriber base. As a reminder, the majority of our customers are subscribed to the basic BOD platform at $120, and those customers will transition to our $179 BODi platform as their subscription comes up for renewal. The new BODi customers will get significantly more value, and we have received no pushback from our partner network. Since adjusting the price in September and before launching our revamped BODi platform, the subscriber file size grew and retention improved.

However, our internal forecast has prudently factored a high level of churn from BOD to BODi due to the price increase. Although we expect subscription declines for the year, I cannot stress enough that we are focused on attracting higher-value customers with a higher ARPU and believe that our Health Esteem platform on BODi will drive stronger consumer engagement and improve customer retention over time. We will continue to manage the business for existing capital and do not see a need for a capital raise. To conclude, I would like to reemphasize the following. We have dramatically simplified the business and are delivering on our One Brand strategy, resulting in significant cost reductions and a clear path to sustainable profitability in 2023. We just deployed our new Health Esteem platform, creating the only holistic fitness, nutrition, and mindset platform.

We're excited by the preliminary results, and this is the foundation to bring us back to revenue growth. With that, operator, please open it up for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is from the line of Joanna Zhao with Bank of America. Please go ahead.

Joanna Zhao (VP of Equity Research)

Hey, thanks for taking my question. Thank you so much for the overview on the rebranding, and congrats on that. My question is just to help everybody to flesh it out a little bit more. Just trying to understand what percentage of today's digital subscribers are actually on BODi already. And also, as you foresee people either renew or, you know, renew the subscription to BODi from the status quo or prior programs, how do you foresee, you know, the ASP will play out for digital subscribers, but also on nutrition subscription as well as connected fitness? Because I understand that you're trying to integrate all three components into one so that people can, you know, get access to nutrition through your Superfoods dessert, but also the bike as well.

Just trying to really better understand how that really will impact the driver, from revenue side, if that makes sense? I have a follow-up.

Marc Suidan (CFO)

All right. Hi, Joanna. This is Marc. Thanks for the question. What I would say is, the BODi subscriber file size, you know, if you recall, this started in the fall of 2021 is when we launched it, and it's basically our library, and at that time, we had the live streaming. Right now, there's 8,500 live streaming workouts plus the 120 programs, and with what we just launched last week, we now also have the BODi Block, the new fitness programming, plus the mindset programming and the revamp on nutrition. Going back to September, right? That's when we adjusted the price down for BODi from $298-$179. That's when the file size, frankly, started growing in a very healthy way.

The reaction has been very positive. We're pretty happy with the way it's growing. Even though I would say the majority of our customers today are still on BOD, BODi has grown in a very, very healthy way, and we're pretty happy with how it's tracking. The ASP, as you asked, the average, you know, let's assume the ARPU or that metric, I mean, at a minimum, annually would be $179. Some people may be signing up to quarterly, which is $99, right? It only makes the ARPU higher in a smaller period. Retention has been tracking better as well, as well as engagement. All the good signs we wanna see for a new offering like that.

Finally, what I would say is, not only are they more engaged and more likely to renew, but we're also seeing a higher attach rate of subscription. Our vision of deploying of attracting customers that are higher value in net seems to be really working out well with all the pilots we did and since launching on March sixth.

Joanna Zhao (VP of Equity Research)

Okay, got it. Thank you. Is there a way to help us understand the renewal rate, you know, from the existing subscribers and switching to BODi? If you can help us to think through that would be helpful. My other question is really on margin. I know that you presented, you know, a few weeks ago, and you provided the margin on three different segments: digital as well as nutrition and connected fitness. You know, digital, as you recall, you mentioned, is towards 80%. Nutrition is, hopefully getting back to the 60% and connected fitness close to breakeven.Can you help us to understand in terms of the timeline, what is sort of realistic or likely timeline for you to achieve these, targets by, so it will help us to model it out? Thank you.

Marc Suidan (CFO)

Yeah, Joanne. Let me start off with you asked about the renewal rate.

Joanna Zhao (VP of Equity Research)

Mm-hmm

Marc Suidan (CFO)

when we first increased BOD in last July from $99-$120, it was an experiment to see how would the renewal rate be impacted. We didn't see much of a negative impact, it was pretty good. Now we're obviously monitoring very closely BOD to BODi. Superficially, this may seem like a pretty big price increase, but I'll just say the biggest starts are actually people who sign up to what we call a Total-Solution Pack. The average Total-Solution Pack before, which is basically the combination of digital and nutrition subscription, was $180, and now it's $220, right? I would say we haven't seen any pushback at all on the price.

To be more prudent, that's why we're not giving full year guidance because there's a lot of change we've deployed. To be even more prudent in our internal forecast, we factored in a lower renewal rate. In general, I would say the jump is not as big on everybody as it may seem from the get-go. You asked about the margin across our three areas. We're not giving specifics there, here's what I would say. Digital, you know, right now is in the high 70s%. You know, we brought down our per episode cost by 50%. I really think at this point, it's a question of scale.

As soon as it starts picking up in size, and I'm talking more on the revenue size, you'd be amortizing the production cost over a bigger base, and that should bring back the digital margin into the low to mid-80s. On the nutrition side, look, it used to be at one point mid-60s. It went down to low 50s. Right now, it's around mid-50s. Our aim is to slowly work its way back up. As you know, we've done a lot of things to improve our supply chain, like closing West Coast warehouse. We're aggressively managing inventory. As you could tell, it's down by more than half for the year. Most importantly is the product mix.

By pushing more Shakeology and reducing low-margin products, that'll be the biggest beneficiary to that nutrition margin to get it closer to 60%. Look, on the bikes, as you know, the bikes is the game on lifetime value of that customer. We're not, we're not gonna aim to be profitable from the first sale on the bike. Our aim is to attract customers at a point where we're not losing too much money up front, but gaining a customer, and our data shows that they're the most committed customer in terms of workouts and renewals so that the lifetime value of that relationship is healthy and positive.

Joanna Zhao (VP of Equity Research)

Got it. Okay, that's super helpful. My last question is just to clarify, for anybody who get on this new brand of BODi, is it optional to do the nutrition, slash, you know, Superfood Health shakes? Also is the option to get on the bike or all of that is a part of sort of your program that people get on the BODi will have access to all? Which means that we'll see an uplift of nutrition subscription as well as the Connected Fitness units delivered.

Carl Daikeler (Co-Founder, Chairman, and CEO)

Certainly that's the expectation. There's a few levers there. This is Carl, by the way. Good to hear from you again. First off, you're right. We've consolidated fitness, the eating plans and the positive mindset content into this one subscription, which comes down to about $15 a month. You can imagine, based on, you know, the number of apps out there, you'd have to have three or four apps to equate to what we're putting into this one synthesized offering. What's beautiful about this is for the first time now the bulk of our subscribers have visibility to the biking content. They couldn't see it before because it was locked behind a different paywall. Now, again, the important strategy about Connected Fitness was selling it into the database.

Now that they've got visibility into their favorite super trainers doing these rides, we expect and have seen that demand for this new offering that Marc described, it will be incremental and likewise same thing with this concept of Eat More Dessert. A superfood dessert as an additional application to Shakeology will give people within our own database who are not currently subscribed to Shakeology an additional reason to do it. If you're gonna have a bowl of ice cream, you might as well have a bowl of Shakeology nice cream at a third of the calories, higher protein, superfoods, fibers, all that good stuff for you, and improve how you feel about your life.

All of these things are incremental and our focus is how do we attract more of what we call super consumers who are inclined to buy, to spend more in the ecosystem as they're having a better experience. At the same time, we do expect there will be some people who just come in for the fitness, who just come in for the eating plans, who just come in for the superfood dessert, or they just wanna ride the bike and do our great rides. The, the à la carte menu is available as well as the everything under the sun menu.

Joanna Zhao (VP of Equity Research)

Got it. That's super helpful. It just basically helps to facilitate your upsell or cross-sell the programs, but it is an optional. Okay, very good. Thank you so much. Super helpful.

Carl Daikeler (Co-Founder, Chairman, and CEO)

Thank you.

Operator (participant)

Thank you. I would like to ask the analyst, please limit yourself to one question and one follow-up. The next question comes from the line of Kaumil Gajrawala with Credit Suisse. Please go ahead.

Kaumil Gajrawala (Managing Director of Equity Research)

Hey, guys. Good, I guess, good afternoon for you guys. Good evening for me. A couple of questions. Maybe starting with, you know, this, the balance between, you know, a big new launch and controlling costs. I guess I wanna ask that in the context of, you know, EBITDA profitability this quarter, great. The guide for first quarter is for a bit of a loss. Can you maybe just walk me through first that balance between launching something new and managing costs? Then, layering on, is the, is the highest amount of launch costs in 1Q, and that should sort of fade as we go through the year? Am I thinking about it wrong?

Carl Daikeler (Co-Founder, Chairman, and CEO)

Well, frankly, the launch costs are covered in the daily operating business. The cost to build this and prepare it really happened in 2022. We just launched it on March 2nd. Now it's running the business, running it efficiently and acquiring customers efficiently into a strong LTV. We don't have the kind of launch costs like we're putting out a movie. This isn't a hits business. This is a business model that we've seen very strong proof of concept really when we started testing it back in March, then again in June, another test in September and again in November. We've seen incremental benefits from this that led to the configuration, pricing and launch structure that we've had today.

I don't think there's going to be necessarily a change without giving guidance to quarters ahead. I don't think there's gonna be a dramatic change. It's not like we were digesting a big CapEx or launch budget in Q1.

Marc Suidan (CFO)

Yeah.

Kaumil Gajrawala (Managing Director of Equity Research)

Okay. Got it.

Marc Suidan (CFO)

You know, good.

Kaumil Gajrawala (Managing Director of Equity Research)

I'm sorry. Go ahead.

Marc Suidan (CFO)

Yeah. What I'll add is that simplification of consolidating all our platforms has delivered incredible results for us, right? We've been able to revamp and relaunch and transform ourselves while dramatically cutting down costs. That's all enabled by having one technology spend, one marketing budget, one production library. This massive cost reduction was all done in a way where we're able to actually deliver more, not less, right? Which should be very beneficial. Our current cost structure is totally set up for this current run rate of the business. From here, by deploying all these changes, all the growth starts delivering the profits thereafter.

Kaumil Gajrawala (Managing Director of Equity Research)

Okay, great. I guess as a follow-up on that, are the costs now where they should be? Obviously, everything you just talked about on bringing down various technology spends, bringing down G&A, is this now the run rate or is there still more to go? I maybe just to make sure that it's clear, there's I think of a difference between cost-cutting and efficiency. I recognize you continue to focus on being efficient, but that some of the big heavy lifting, would you say that's complete now after 2022 and we get on with it, or is there still more to do?

Marc Suidan (CFO)

I would say it's largely complete, right? There's still a few things to flow through to get the benefits. I mean, the last reduction in force we did was in January. For the most part, we're pretty close to realizing the benefits of all the cutting we've done and driving the efficiency we want. You could see from our CapEx spend in 2022 versus 2023, that's more likely to be the profile of our CapEx spend going forward. We had some one-time costs in Q1 to incur due to the reduction in force and the severance.

Once we start exiting that, I'd say we've pretty much set up the business to be able to run at this size. All the changes we're making is all about driving new growth. The leverage model will create the profitability from there.

Kaumil Gajrawala (Managing Director of Equity Research)

Okay, great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Jonathan Komp with Baird. Please go ahead.

Jonathan Komp (Senior Research Analyst)

Yeah. Hi, good afternoon. Thank you. First question I wanna ask, if you could be a little more specific, what's the year-end cash balance that you're targeting? Could you share a bit more insight just to the key performance metrics that you're including to forecast that?

Marc Suidan (CFO)

Yeah, John, this is Marc. What I would say is we like I just said in that previous question, we have a bit more cost to incur in this quarter for one-time costs. Then afterwards, largely at this size, we set up the business not to burn more cash. Our plan is we're trying to drive this in a way where we avoid going below our net debt balance and start generating positive cash flow from there. I think the most critical thing to watch out for in terms of KPI, given all the changes we've done, is gonna be the digital revenue, right?

Because we're shifting to this higher value customer, that line will be critical to see if we're netting out, and our plan is to net out more favorably on the revenue side, despite having a bit less subscribers.

Jonathan Komp (Senior Research Analyst)

Okay. I guess I'm trying to understand more of the revenue assumptions you're making, given the very significant changes to the business model here. If you could share a little bit more insight on the last comment you just had, you know, effectively raising the price of your core product by 50%, how you expect the subscriber base to play out, and if you have any specific test data to base that on.

Marc Suidan (CFO)

Yeah. Yeah, no, we have plenty of test data, John. What I'd start off by saying, that's why we did the July, we did the July price increase on BOD to test that out. When we brought the, in September, the price of BODi from $298-$179, the reaction was very positive. We surveyed our coaches and partner network extensively. They're incredibly supportive. Mainly because that's what I was saying earlier. When they bring in customers, they mainly start them off on what we call a Total-Solution Pack, which is both a digital and nutrition subscription. On average, that's going up by $40, right? It's going up from an average of $180-$220, then it goes to the normal nutrition subscription.

All in, we don't think it's that big on most of our customers. It's still considered great value for everything they're getting 'cause when you take the $179, and that's like $15 a month. From all the research and pilots we've done, we haven't seen anything that worries us that the other way around, we're seeing a lot more positive because those people are more engaged, retention is looking healthier for the BODi cohort. The nutrition subscription at that rate is looking healthier. Everything we had in our vision, we're seeing play out through all the pilots and tests we've done and since our launch.

Jonathan Komp (Senior Research Analyst)

Okay, two more questions for me. Just as you think about the timeline for renewal, the 2 million digital subscribers that you ended with, can you just share more insight what time of year you expect the majority of those to renew and, you know, at what point will you know the success rate of your switch, and how would you react if the results are any different than you're expecting?

Marc Suidan (CFO)

Yeah. The majority are on an annual subscription, which means they flow monthly through March of 2024. There's a bit of skewing towards the first six months because some are monthly, some are quarterly, some on a six-month plan. The majority are annual. I'd say a bit skewed through the first six months, but overall, we'll see that 1/12 come through every month all the way through March 2024.

Carl Daikeler (Co-Founder, Chairman, and CEO)

One of the things I'll say, John, is Jonathan, is that the $179 does give us an advantage that we didn't have at the lower price point. And that is, and we're in the midst of testing customer acquisition now through our direct channels. We run that very cautiously because we're sensitive to the cash flow implications of quote, unquote "buying subscribers" that have too long of a payback. The $179 gives us much more room to buy a customer and get return of capital within year. We've got room to run a higher LTV or a higher LTV per start on those new digital subscribers. If anything goes sideways on us, and we've been very conservative with the way we forecast the renewal rate.

If anything goes sideways on us, we have extra room in acquisition and intend to, frankly, this is where growth can come from, that we take that extra room in the margin of the 179 versus the 119 for customer acquisition. We can shift our emphasis over on acquisition from renewal if anything goes sideways. Again, you balance all these factors, right? Because the thing we promised the market and the, you know me, the way I like to run the business is I like to run it free cash flow positive. The first thing we need to assure for is that we're running in a positive EBITDA as soon as possible. We start to make sure we're investing in growth, but not the other way around.

We're balancing these things, and we're doing it in a conservative, rational way, given some of the other uncertain macro factors at play.

Jonathan Komp (Senior Research Analyst)

Understood. Just last one for me on the Connected Fitness business. It's obviously a drag on the income statement currently. Can you just share more specifics on the LTV that you see for that customer? And how do we know that it's not a broader distraction on the business just given the size where it's at today? Thanks for taking all the questions.

Marc Suidan (CFO)

Yeah, John, thank you. On the Connected Fitness one, with this new bundle we've launched, it's $1,800 upfront, financed through a buy now, pay later firm called Affirm. We get the majority of the money upfront. Cash flow-wise, it's actually very beneficial. Honestly, I think it's the best deal out there you could get for Connected Bike. It does not take a lot of our attention at all. Really, I think now that we've launched this new BODi platform and there's so much more subscribers on BODi, they'll start seeing the bike workouts, right? They just won't be able to use it. It makes it a lot easier for us to market this to our database so we can drive more demand.

Carl Daikeler (Co-Founder, Chairman, and CEO)

The one thing I'll say, John, is that, I'm very excited by this. You know this company. Like, we continue to innovate and test and learn, test and learn. That's what we did to make P90X a success and Insanity a success and Shakeology a success. Having that lever of the Connected Fitness, it's such a good customer. This rich, the volume of people in our database, now that they'll all have visibility to our biking content, that just started on March second. I'm actually very excited by the prospect of the Connected Fitness business, we're not doing it, at a way that drags the business, to your point. It's not a distraction.

It's just an area of creativity, where now we get to bring our best skills to the table, and that is creating content and use cases so the people who get on that bike are gonna be getting results and having a great time as they do it. I will say, when this thing launched March second, and people actually, it was the Monday the sixth that they really started to use this new content. We absolutely saw a jump, a significant jump in engagement, on both the BODi platform and on the bike. Engagement is good proof of demand. I feel like we're in a very good position.

It's, as Marc Suidan said, the consolidation of the business and the subscriptions just made this a much more efficient business model that now our network of partners, we used to call them coaches, our partners have the ability to stay focused, and they're not changing gears every three months. They've got a simplified view of how the person comes in, you know, we're helping. How can you make $200 a month? How simple can that be? Like we like to say here, simplicity is velocity, and I think that's what we've just achieved here with the launch of March.

Jonathan Komp (Senior Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim. Please go ahead.

John Heinbockel (Senior Managing Director and Equity Research Analyst)

Hey, Carl, I wanted to start with, when you think about getting the word out, right, on the new brand positioning. You know, what is the plan on that? To the extent that the BODi Partners are gonna do a lot of heavy lifting on that, is there a prioritization, right, that in the first, I don't know, six months, we want them to focus more on the conversion, right, and educating the existing base as opposed to prospecting, you know, or not, right? You do both at the same time.

Carl Daikeler (Co-Founder, Chairman, and CEO)

That's exactly right. Our focus is with our best customers, the current cohorts and, you know, that's where we leverage our social media following that between corporate and our ambassadors. We got 20 million people following us, including our current subscribers. Our job is to make sure that we are surfacing the concepts, the value, the positive mindset content, the two eating plans, and all of this content, four new plans that drop every month to all of these subscribers to maximize renewal and to maximize engagement and obviously, hopefully, results for those customers. That creates a referral engine, and that's where our partners are so powerful. Now we don't have to train them on a new program every other month.

We've got this same, what we call the BODi Block construct, that they get to market month after month after month with a new wave of plans dropping the first Monday of every month. It's the same construct will create velocity. You got these two layers, right. First priority, maximize sell through into the current subscriber base so that they understand the value that they're getting. Second, leverage the great experience and referrals through the partner network for incremental subscriber adds at a guaranteed payout. That's the business model that we've been running really for the last 15 years. Now it's more simplified so that the partners can be more efficient.

Marc Suidan (CFO)

Yeah. John, this is Marc. Let me just add to that. On the rebranding part, you know, when we add up our social media followers or super trainers followers, our key coaches, it goes to well over 20 million, and then our email database is over 10 million. Our ability to inform people and turn it into an opportunity to tell them who we are now and where we're going is not something that requires marketing spend. We're able to do it via our existing mechanisms and budgets.

John Heinbockel (Senior Managing Director and Equity Research Analyst)

All right. My follow-up would be, are you talking about the nutrition attachment rate, right? I think in the past that was, I don't know, maybe in the mid-teens or something like that. You know, where do you think that goes to? You know, what happens to the... I know there's a bundle here, so maybe it's hard to parse out a nutrition ARPU, right? I think the nutrition ARPU right in the past was quite high. Does the attachment rate go up and the ARPU go down a fair bit or no?

Marc Suidan (CFO)

Yeah, John, look, you're right. Historically, it was in the very high teens. Right now it's, I mean, if you just take the numbers, it's around that 10% mark. We got to bring it back to where it was. Everything we're seeing, like I said earlier, the BODi file size is growing well and the nutrition attach rate is where we want it to be. I say that in a favorable way. On the ARPU for nutrition, it is around, I wanna say, $100-$110 a month on average per subscription. 2/3 of that business is subscription, 1/3 is one-offs that through CRM and other campaigns we do or other products they want.

Carl Daikeler (Co-Founder, Chairman, and CEO)

Yeah. John, I'll add. If I can add, our CRM activities are literally of my role, my top four priorities, CRM of selling nutritionals, and particularly this idea of expanding Shakeology into the healthy dessert category is one of my top four priorities. Another one of my top priorities is to maximize sell-through of our number one supplement, and that is our pre-workout Energize, which I happen to have twice a day, my morning coffee and as my afternoon pick-me-up. We're seeing that through the really, that gets traction through the entire database. We've got consultants who have been helping us install what we call CRM sequences, that once you install them, you understand what a five or six email sequence, what that productivity and return on that sequence can be.

You install it and let it run. Somebody cancels or somebody laps or pauses or changes flavor, like we've got a sequence that runs. It communicates with those people in a way that now becomes predictable, additional revenue, retention, or additional LTV. This is a priority. While, you know, we traditionally see a decline in the nutrition file just from Q3 to Q4, the fact of the simplification of the business, like I said in my opening remarks, we've moved it from 190 different configurations that our prospects had to wade through to five. We've also added a new SKU, which is 20 servings of Shakeology and 20 servings of Energize. This is being used in a couple of ways.

It's a holistic product for people so they can get both of these things and not have pantry loading, meaning they're not gonna be at the end of the month, still haven't burned through their product, so the next shipment is layering on top of that. Now it's just 20 servings, it's appropriate to their consumption. Also, it's a sampling opportunity, and we're seeing people who are taking what we call the Shake & Hustle pack of these two products are then making a decision. Do they like that configuration or do they wanna pick one or the other rather than cancel the one thing that they got?

These are all of the levers that we've been experimenting with in the back half of the year and going into the first quarter that give us a great deal of confidence that not only is the business model healthy, but we're making improvements to increase attach rate, which increases LTV.

Operator (participant)

That concludes the question and answer session. I would now like to pass the conference back to Carl Daikeler for any closing remarks.

Carl Daikeler (Co-Founder, Chairman, and CEO)

All right. Thanks so much. I appreciate everybody jumping on. I know we went over a little bit here, but, you know, at the end of the day, the most exciting thing to take away from this call, which I hope our stakeholders see, is that the hard part is behind us. The cost profile's been addressed. We've added this compelling layer of content and positioning to add appeal to, like. It's an entirely accretive market that the fitness and nutrition business hasn't been speaking to. It's the people who are doing nothing. The category of Health Esteem is creating net new demand in a market where the majority of the population is still looking for the resource to help them look and feel good without having to give up the lifestyle that they love to live.

We're very excited by what 2023 has in store for us, and we're gonna execute the way you've seen us execute for 24 years. I appreciate everybody's support to build the greatest resource for a healthy, active lifestyle in the world. This is no small undertaking, but, the ultimate outcome is gonna be a powerful company and business and very rewarding for everybody involved. Thank you, everybody.

Operator (participant)

That concludes The Beachbody Company's fourth quarter and full year 2022 earnings call. I hope you all enjoy the rest of your day. You may now disconnect your phone.