Gaia - Q2 2024

Transcript

Operator (participant)

Good afternoon, and welcome to Gaia's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. Joining us today from Gaia are Jirka Rysavy, Executive Chairman, James Colquhoun, CEO, and Ned Preston, CFO. After the speakers' presentations, there will be a question-and-answer session. Before we begin, Gaia's management team would like to remind everyone that management's prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions, including, but not limited to, statements of expectations, future events, or future financial performance. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. Although we believe these expectations are reasonable, Gaia management undertakes no obligation to revise any statements to reflect changes that occur after this call. Actual events or results could differ materially.

These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factors section of Gaia's latest annual report on Form 10-K filed with the SEC. All non-GAAP financial measures referenced in today's call are reconciled in the company's earnings press release to the most directly comparable GAAP measure. This call also contains time-sensitive information that is accurate only as of the time and date of this broadcast, August 5th, 2024. Finally, I would like to remind everyone that this conference call is being webcast, and a recording will be made available for replay on Gaia's Investor Relations website at ir.gaia.com. I will now turn the call over to Gaia Executive Chairman, Jirka Rysavy. Please proceed with yours.

Jirka Rysavy (Executive Chairman)

Good afternoon, everyone. So, for the quarter, we continue to build in our increasing momentum. During the second quarter, which is actually our season's lowest, we grew revenue at the same rate as we did in first, and by 11% to $22.1 million. We expect revenue growth to be similar during the third quarter and then to increase to about 15% in the fourth quarter. The member count during the quarter grew by 10% to 850,000 members, up from 774,000 in the year-ago quarter. Including some of the non-recurring expenses we have in the quarter, our loss was similar as last year, at $0.09 per share. Free cash flow was $700,000 for the quarter and $1.6 million for the last six months, which is $2 million improvement on the top of $8.4 million improvement we delivered during last year.

In 2016, Gaia invested $10 million, and we recently raised $12 million from outside investors for our subsidiary, Igniton, with Gaia still retaining 71% of equity. Igniton used $10 million of cash to acquire exclusive worldwide license for Igniton Health Technology. This technology uses concentrated quasi-particles transmitted by the sun to improve cognition, memory, and longevity. Technology can be delivered by various means, from embedded food supplements to controlled release from coated microchips, like, for example, from Gaia connected TV device. James will now speak more about the business advantage.

James Colquhoun (CEO)

Hello, everyone, and thank you, Jirka. Our Q2 results reflect our ongoing commitment to delivering transformative content and growing our community. During the second quarter, traditionally our slowest, we achieved an 11% increase in revenue and a 10% growth in membership year-over-year, while also marking our fifth consecutive quarter of positive free cash flow. We have also implemented a price increase for new members starting in July, which we expect to positively impact our revenue by the end of the year. The timing of this increase was moved from Q2 to Q3 to strategically align with our third-party partners, ensuring minimal disruption to our members. Traditionally, we have grandfathered existing members on old pricing. However, we are currently testing a price increase for all new members in Great British pounds.

Should this test be successful, we would roll out price increases for all members from Q4 onwards, which will be the first time we have done this in the history of the company. Additionally, as of today, we are excited to officially announce the public launch of Gaia Marketplace to our entire member base and community. This initiative not only strengthens our community engagement, but also introduces an alternative revenue stream to the Gaia business. Gaia Marketplace offers transformative tours and experiences for Gaia members to connect with like-minded community from across the globe, from exploring ancient civilizations in Egypt, delving into transformative healing practices in Costa Rica, and awakening one's highest potential on curated retreats with leading teachers from Gaia's platform. Members will also have access to powerful courses, training programs, events, workshops, and conscious products chosen and backed by research for exceptional quality and impact.

Gaia Marketplace underscores the company's continued commitment to creating a global conscious community, and you can find out more about this initiative at marketplace.gaia.com. Looking forward through the end of the year, we will continue to execute on increasing the number of members on our new higher pricing, expanding the rollout of our Marketplace initiative, scaling our member growth in our premium tier, and overall making improvements on free cash flow generation and increases in annualized ARPU. Our CFO, Ned Preston, will now provide more detailed financial insights.

Ned Preston (CFO)

Thank you, James. Turning now to our financial results for the second quarter ended June 30th, 2024. Revenues for the second quarter grew $2.2 million, or 11% to $22.1 million, from $19.8 million in the prior year-ago period. This also marked our fourth sequential period of year-over-year top-line growth.

Member accounts increased 10% to 850,000 as of June 30th, 2024, up from 774,000 members as of June 30th, 2023. Gross profit in the second quarter increased to $18.7 million, up from $17 million in the year-ago quarter. Including non-recurring expenses, net loss was -$2.1 million, or -$0.09 per share, which is the same as the year-ago quarter. Operating cash flows for the first six months finished at $3.9 million, representing a $2.6 million improvement from the first six months of 2023, and continues the momentum we've delivered in the prior four quarters. Free cash flow for the second quarter was $700,000, up from $200,000 in the year-ago period. The second quarter of 2024 was our fifth consecutive quarter of positive free cash flow.

In the last six months, both revenue and member growth were stable at over 10%, with an improvement in free cash flow of $2 million on top of the $8.4 million improvement delivered during 2023. As of June 30th, 2024, our cash balance was $5.5 million, with an unused $10 million line of credit. That completes my summary. I'd like now to turn the call back over to Jirka for his closing comments. Jirka?

Jirka Rysavy (Executive Chairman)

Yeah. So, for the summary, we expect increasing annual revenue growth rate with continuing growth of ARPU and increasing gross profit per employee and continued generation of positive free cash flow. And this concludes our remarks, and I would like to open the call for questions. Operator, please.

Operator (participant)

Thank you. We'll now open the line for questions from the company's participating analysts. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Mark Argento with Lake Street Capital Markets. Please proceed with your question.

Mark Argento (Co-Founder and President)

Hey, guys. A few different questions here. Maybe James will start off with the price increase. Could you just walk us through kind of what your plan was previously and then the new plan? It sounds like you're shifting out the taking price a little bit to align with some of your partners. Could you just walk us through kind of that process and then the actual price increases? I know you talked about some about the Great Britain or British Pound denominated, but just kind of walk us through that again. That would be helpful.

James Colquhoun (CEO)

Sure, Mark. So, first of all, we increased our pricing in Great British pounds and euros in Q2, and we had intended to increase price for new members, that is. And we had intended to increase price for new members in USD and rest of world currencies in Q2 also. However, that was pushed until the start of Q3, just in terms of lining up price increases with our third-party partners. Some of them, like our biggest partner, Amazon, was not able to increase until Q3. With Great British pounds, we are testing for the first time ever increasing the price for all existing members. As a company, we have traditionally grandfathered members on existing legacy pricing, but we're currently testing an increase for all members in Great British pounds.

We're anticipating that this increase will be successful and that we make a margin on the delta from the increase in relation to any losses. If that is the case, then we would anticipate considering increasing for all members in the Q4 period. So, hold for more information on that as the year goes on.

Mark Argento (Co-Founder and President)

Do you anticipate a similar cadence in the U.S., or just focus right now in terms of the British Pound?

James Colquhoun (CEO)

After we test the Great British pound impact on member losses, then we'll anticipate rolling out to USD price increases and other rest of world currencies as well in remaining countries.

Jirka Rysavy (Executive Chairman)

Yeah. With kind of targeting about $2 in the U.S., it was more in the U.K., probably GBP 3+, right? Because the difference in currency, so we try to catch it up to the dollar. So, it's a higher increase in the U.K. than we would do in the U.S. But, so we're targeting about $2 in the U.S.

Mark Argento (Co-Founder and President)

Is that roughly kind of a 20% blended average, or how do you guys think about that?

Jirka Rysavy (Executive Chairman)

Yeah. I mean, the $2 is about 17.5%, but if you kind of take this some third parties, depends on their currency, then probably 20% is probably accurate.

Mark Argento (Co-Founder and President)

Great. And then just pivoting quickly to Marketplace. I know it's early and you just got to kind of up and running, but what are your expectations in terms of what does that business? Does it incrementally generate meaningful revenue this year? Is this year more a testing year? Think about adding incremental revenues meaningfully next year. What should we kind of expect to see in terms of?

James Colquhoun (CEO)

Sure. So, we've been primarily testing Marketplace and beta up until today. So, today, there was a release that went out prior to our earnings release announcing the rollout of Marketplace to our entire member base. Based on our testing to our beta groups, we're optimistic about the revenue opportunity contributed from Marketplace. We do see that growing sequentially over time, typically because of how the revenue is attributed. So, we anticipate most of the revenue to come from retreats and experiences. And so, if we take sales for a retreat now in Q1, we'll be building up that deferred revenue in Marketplace. So, much of the "sales" that we take now, and for instance, in Q3 and Q4, a majority of that would also be deferred revenue, which would hit in Q1, Q2. So, we see a stacking effect of that throughout the year.

Alongside price increase, where, like Jirka had hinted at in his script, we see our growth rate increasing from double digits currently to sort of mid-teens in Q4, and we anticipate that Marketplace will contribute to that mid-teens growth as we go into 2025 alongside the price increase attribution as well.

Jirka Rysavy (Executive Chairman)

You should look at community Marketplace as a part of the community. Our goal with Gaia is to ultimately be a conscious community worldwide. And we would plan to launch actually the actual community kind of by end of the next year. And so, Marketplace is kind of part of that. We spend no basically separate marketing expenses. It's basically only to our members. So, there's kind of email and being on site. So, it's pure increase to ARPU. It should break even pretty quickly. It's not breaking even now, so contributed to some of the losses this quarter. Will probably be in a third because we already stopped and we don't have the revenue yet. But that will get pretty quickly because we just use about four people. And so, when you kind of look at it, look at it as beginning of the community.

So, global community of like-minded people, that's how we look at it.

Mark Argento (Co-Founder and President)

Great. Last one for me. You've mentioned this Igniton, I think I'm pronouncing that right, that you guys have invested some money in, raised some additional capital. Is this a product at this point? Is it that you're going to be able to commercialize this? Maybe talk through a little bit of the concept here, what it is, and how over time you think you can monetize it.

Jirka Rysavy (Executive Chairman)

We would assume that we'll get started monetizing next year. It's a technology, as I mentioned, kind of concentrate and stabilize this quasi-particle from the sun, which is known to ancients, but it was never used that way. So, we are right now embedded in this food supplements, which was tested over the last 2 years. And typically, the results of the studies, they were actually published in peer-reviewed medical journals. And this improved the memory 80%-100% within 30 days. So, it's very significant, a lot of interest. We're not monetizing it yet. But ultimately, the idea is for Gaia that we can release some kind of device, connected TV device, and we can deliver it through the ingestion of coated microchips using Gaia broadcast. And so, it's obviously a few years off for that part, but it was always very promising. The results are stunning.

People who get the samples, we did it with our employees, and so also improve brain capacity, cognition. So, it's very promising, but it's early. But that's why we kind of decided to raise some outside money. So, it doesn't chew on Gaia's additional free cash flow because we pretty much committed to this free cash flow with Gaia.

James Colquhoun (CEO)

I would also just add to that, Jirka and Mark, that these two use cases that Jirka suggested on the embedded food supplements and the microchip are just two potentials for the technology. So, it's very exciting that we have this announcement for this quarter.

Jirka Rysavy (Executive Chairman)

We probably also, as this product will launch in the form of supplements, it will be launched at one of the channels will be in Gaia Marketplace.

Mark Argento (Co-Founder and President)

Great. Appreciate the call, guys. I'll hop back in to you.

Operator (participant)

Our next question comes from Thierry Wuilloud with Water Tower Research. Please proceed with your question.

Thierry Wuilloud (Managing Director)

Yes. Good afternoon. Mark covered quite a few spots there, but maybe on Marketplace, is it going to be a challenge to scale it up, or how do you see that? How do you see that working? I mean, I'm looking at maybe trips to Egypt or offering of that kind. Can you really offer that to the whole membership base, which is obviously very large at this point?

James Colquhoun (CEO)

Hello, Terry. Good afternoon. Thank you for your question. So, with Marketplace, we anticipate building revenue slowly over time. And like I'd mentioned in my previous answer, a lot of the sales "that we might be taking now" would be deferred into future quarters as the way we book it when the retreat happens or this tour happens. So, this is something we'll be growing over time and testing into. And our beta tests to small segments of our member base were very promising, and we're excited about the opportunity of this in particular in terms of how it's going to help us move towards these sort of mid-teen growth in 2025. With regards to the tours, you mentioned Egypt. This applies to a segment of our audience in particular that is interested in one of our tentpole series, Ancient Civilizations.

But we have also now on the Marketplace side a varied array of retreats, tours, experiences, courses, training programs, live events that now cater to many different segments of our member base and different content and shows that our members have grown to love. So, you'll see that we have different experiences and offerings to cater to all these member subsets. And we anticipate that given our capacity to be able to target these members through onsite and in-app contextual promotion and email promotion and notification promotion, we'll be able to reach these members with these exclusive offers and discounts and build that momentum in revenue attribution over time.

Thierry Wuilloud (Managing Director)

Okay. Great. On the price increase, I was wondering, do you have expectations in terms of you increase the price by $2 or by GBP 3? Do you have expectation as to what kind of attrition could be caused by that, and how do you balance the trade-off?

James Colquhoun (CEO)

Well, we don't really have any benchmarks, so there's certainly no other companies that publicly publish benchmarks that relate to price increases. However, when we've done this in the past in terms of acquisition, we do see that we make the delta on the increase. And we anticipate that we would be doing the same as we roll out these tests into Great British pounds and further. And so, that's what we're currently aiming for.

Jirka Rysavy (Executive Chairman)

Yeah. We never raised money before for existing members. For new members, we did raise the price for about $2 in 2019. So, that time was about 20% price increase. The kind of increase in conversion and basically losses, but it was more kind of decreases in conversion, took about 8% out. So, the gain was about 12%, 11.5%-12% that time for the new members. We have no other existing members. We have this test going in Britain, and we probably wouldn't know for another 30 days.

Thierry Wuilloud (Managing Director)

Okay. Finally, about Igniton, you talked about food supplements. You talked about microchips. It seems the food supplements would be maybe a more straightforward way to deliver the product or the substance. How close are you to maybe some revenue from that or from launching that?

Jirka Rysavy (Executive Chairman)

Well, I just answered that question. We expect to do that early next year.

We already have it. We can do it effectively now. We're just finishing some more studies. But all the technologies and equipment in a place of it can technically do it even the fourth quarter, but our plan is to do it. We might be able to do it before for Christmas, but our target is for next year.

Thierry Wuilloud (Managing Director)

And do you have a sense of what channels you're going to use to market that?

Jirka Rysavy (Executive Chairman)

Well, there are several different channels, which I mentioned one of them would be on our Marketplace. Second, Igniton already has a network of distributors in 50 countries targeted mostly practitioners, hospitals, and research labs. And so, we would use our existing channels in Igniton. And there would be few other channels which will be finalized over the next 90 days.

Thierry Wuilloud (Managing Director)

Okay. Great. Thank you. Appreciate your time and your answers.

James Colquhoun (CEO)

Thanks, Thierry.

Operator (participant)

Our next question comes from Shahin Ismayilov with Freedom Broker. Please proceed with your question.

Shahin Ismayilov (Analyst)

Yeah. Thank you. Good afternoon, everyone. My question is about your media library. Can you share your plans for expanding your media library and what level of investments are you targeting this year and possibly next year as a percentage of your revenue? Thanks.

James Colquhoun (CEO)

Okay. Sorry, I didn't quite catch your name there. It's James here, the CEO, and I'll also pass to Ned for some sort of more specifics on this or to confirm. With regards to investment in our media library, one of the unique points of difference we have as a streamer is that we own over 85% of our content library. We also have over 98% worldwide rights for all of our owned content and any licensed third-party content. Currently, we're spending circa 11.5% of our revenue on content production.

Jirka Rysavy (Executive Chairman)

I would kind of say that's on direct because we also do licensing, right? So it's probably total about 14%.

James Colquhoun (CEO)

As, like Jirka said, about 11%-11.5% on produced content, 14% total including third-party acquired content. We'd anticipate in 2025 potentially increasing the produced content percentage over time and adding to that media library asset. We've also spoken, Ned and Jirka and I, on potentially having our media library revalued. We did have it valued a number of years ago, and we see it as a huge strength to the business owning that much content on our balance sheet and being able to leverage it into new languages and new markets as we grow and expand.

Ned Preston (CFO)

Yeah. Hey, Shahin, it's Ned Preston. Thanks for the question. Yeah. You've probably seen some language in our investor relations deck or presentation on our IR website. On the balance sheet, we make some notes, and anyone who's met with us in person, that we're quite proud of our media library.

We value it at at least $150 million. And I know from transitioning from auditors this past Q4 that that's a solid number. We have gone out and looked at doing a formal revaluation here in the middle part of the year. We feel comfortable that that $150 million will stand or could even be slightly higher. But back to James's earlier point is that we use a lot of data to evaluate what content, what to add to our media library. And also in that presentation deck, you can see that over time, a lot of our content is timeless. A lot of it really retains its value over long periods of time. And thus, the fact that our library value doesn't shrink, if anything, it'll grow as we add new content.

I'd love to talk about it with you in more detail as we get to know you and the Freedom Broker team further, Shahin. Thank you.

Jirka Rysavy (Executive Chairman)

I would generally say because we produce our content very differently than pretty much anybody on streamers, they mostly hire independent producers, and the producers then hire what's called spot labor. So the overall margins what they have to book in the content what gets on a balance sheet is more than twice what we do. We also know when we produce content for PBS or Discovery that roughly if you get a budget from them, it would cost us about half what the budget would be because we use pretty much only as a full-time employees who move to our studios to Colorado.

You can also other ways you can see that if you kind of see the number of content what we have in the balance sheet compared to other streamers, you would see that we would have maybe 2.5x-3x higher GP contribution than they would have because our cost and balance sheet is probably half what somebody else would put it. That's our big advantage compared to future.

Shahin Ismayilov (Analyst)

Okay. Thanks for your question. I have another question.

James Colquhoun (CEO)

Of course. Go ahead, Shahin. Maria, did we drop or did we lose Shahin?

Operator (participant)

I think, Shahin, are you muted? Can you?

Shahin Ismayilov (Analyst)

Can you hear me now?

James Colquhoun (CEO)

Yes. Yes.

Shahin Ismayilov (Analyst)

Yes. As I said, I can see that your net cash flow from operating activities is negative and is quite large negative. Can you explain it for me, please?

James Colquhoun (CEO)

For Q2. Yeah. Yeah. So through the first six months, our operating cash flows are positive. As you can see, free cash flows in the quarter were positive. In the second quarter, we had a number of non-recurring expenses hit us leftover from a restatement that we announced at the end of Q1 as well as some of the work that went into launching Igniton. So that's really at the core of why operating cash flows were negative for the quarter. We expect to get that back on track in the third quarter.

Jirka Rysavy (Executive Chairman)

Yeah. We as a company, and we kind of said at the beginning of the year, we operate based on a free cash flow, which was positive. We expect to be positive. We generate cash every quarter for the last five quarters.

Shahin Ismayilov (Analyst)

Yeah. Okay. Thank you.

James Colquhoun (CEO)

Thank you.

Operator (participant)

At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Rysavy for his closing remarks.

Jirka Rysavy (Executive Chairman)

Thank you, everyone, for joining. We look forward to speaking with you when we report our third quarter, which will be by the end of October. Thank you very much.

Operator (participant)

Thank you for joining us today for Gaia's second quarter 2024 earnings conference call. You may now disconnect.