Gaia - Q3 2024

Transcript

Operator (participant)

Good afternoon. Welcome to Gaia's third quarter 2024 earnings conference call. At this time, all participants are in 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 expectations are reasonable, Gaia's 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 factor 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, November 4, 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. Thank you, and over to you.

Jirka Rysavy (Executive Chairman)

Good afternoon, everyone. During the third quarter, which is seasonally slow, we grew our revenue at a similar rate as the first part of the year, at 10%. Gross profit increased 11%, with gross margin improving to 86% from 85.2% at the year-ago quarter. Member count grew at the same period by 7%. The third quarter was our sixth consecutive quarter of positive operating and free cash flow, which improved about $1.5 million during the quarter this year. Over the last few months, we raised, for the first time in our history, our subscription prices for all members by at least $2. While the initial losses from the price increase kept our member count for the quarter flat, we expect the price increase will push our revenue up from the current $22.2 million in this quarter to almost $24 million during the fourth quarter.

James will now speak more about other advances in the business.

James Colquhoun (CEO)

Hello, everyone, and thank you, Jirka. As mentioned, for the first time in Gaia's history, we began the implementation of a price adjustment for our legacy members, as we have typically grandfathered members on legacy or old pricing. Following a successful pilot in the U.K. in Q3, we expanded this initiative to include our third-party platforms at the end of this quarter. While the decision temporarily impacted our member count, it is set to create a strong uplift in revenue, and we are optimistic that members will return to growth in Q4, and we will close out the year with over 850,000 subscribers. At the start of Q4, we began price increases for our direct members on legacy pricing, and early data suggests that this is already surpassing our expectations. This is a very encouraging indicator for revenue growth momentum as we move into 2025.

Looking ahead to Q4, we expect our first full quarter of revenue contributions from Gaia Marketplace, and as Marketplace scales alongside our new pricing strategy, we anticipate gross margins to rise above 86%, a powerful improvement in our financial profile. Additionally, our marketing team's continued focus on attracting more annual members at sign-up, together with increases in our tenured member base, has resulted in a substantial improvement in retention over the past 12 months. This stabilized long-term member base sets us up for even stronger strategic positioning as we roll out the new pricing for legacy members. Q3 also highlighted the impact of our live events and premium membership tier. We hosted two GaiaSphere events, including our largest ever Ancient Civilizations Conference and our sold-out Gene Keys event.

We're thrilled to see even more enthusiasm in Q4 with the recent sold-out channeling event, and coming up this weekend, we will have our first-ever Heal Conference. Finally, we're excited to announce our partnership with ElevenLabs as Gaia's official provider for AI-powered dubbing and translation services. This collaboration will allow us to streamline and accelerate the process of adapting our content for a global audience. By leveraging ElevenLabs' advanced technology, we'll be able to reach new viewers more efficiently in their native languages, enhancing the accessibility of Gaia's offerings. Looking forward to the end of the year and beyond, our focus remains on executing on the price increases for existing members, broadening the reach of our Marketplace initiative, growing our premium membership tier, and driving improvements in annualized ARPU. Our CFO, Ned Preston, will now provide deeper insights into our financial performance. Ned.

Ned Preston (CFO)

Thank you, James. Turning now to our financial results for the third quarter ending September 30th, 2024. Revenues for the third quarter grew $2 million, or 10%, to $22.2 million, up from $20.2 million in the year-ago quarter. This also marked our fifth sequential period of year-over-year top-line growth. Member count increased on a year-over-year standpoint to 846,000 as of September 30th, 2024, up from 790,500, or 7%, from September 30th, 2023. Gross profit in the third quarter increased 11% to $19.1 million, up from $17.2 million in the year-ago quarter. Net loss was negative $1.2 million, or -$0.05 per share, compared to the year-ago quarter at negative $8 million, or -$0.04 per share, driven primarily by the absence of the employee retention tax credit recognized in the third quarter of 2023.

Adjusting for the $1.8 million ERTC recognized in Q3 of last year, the quarterly net loss improved by $1.4 million. Free cash flow for the third quarter was $100,000, representing the sixth consecutive quarter of positive cash flow. In the last nine months, both revenue and member growth were stable near 10%, with an improvement in free cash flow of $1.6 million on top of the $8.4 million improvement delivered during 2023. As of September 30, 2024, our cash balance was $4.4 million, with an unused $10 million line of credit. That completes my summary. I'd like to now 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, which will be supplemented by the price increases as well. We obviously want to continue increasing gross profit for our employee and continue generating a positive free cash flow. This concludes our remarks. I would like to open the call for the question. Operator, please.

Operator (participant)

Thank you, sir. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. The first question comes from Mark Argento with Lake Street. Please go ahead.

Mark Argento (Analyst)

Hi, guys. Good afternoon. Just wondering if we could dig down a little bit on when you took the price increase, kind of what did you see the subscriber base? Did you get some initial churn? And then it moderated? Or maybe you could just talk through kind of what the experience was there.

James Colquhoun (CEO)

Hey, Mark. It's James here, so with regards to the price increase, there's two elements to this. First of all, price increase for new members as we increase it for acquisitions, and then second of all, which I think is the meat of your question there in terms of impact on existing members. First and foremost, when we increase it for new members, we do see acquisition costs increase for a period of time, and then they settle down, and so that we're making the delta from the price increase, which we have seen happen, especially as we head into Q4. With regards to churn event on the existing cohort, so within Q3, we did a test cohort in the United Kingdom. In that region, we increased north of 30% because we had to make some adjustments for currency fluctuations, and we were very surprised with the results there.

We made by far a significant margin on the delta of that price increase. This encouraged us to roll it out to third party, which we did to our third-party platforms at the end of Q3. This had a slightly higher churn, I would say, than direct. I would say partially we don't have a close connection with the third party in comparison to direct and what we call our apps, which makes up the vast majority of our members. We've started in Q4 price increases for our legacy member base. We're a month into those notifications, and we're seeing a similar result to United Kingdom. We're very impressed, and we're in a good spot to see our growth rate accelerate in Q4 and beyond.

Mark Argento (Analyst)

That's helpful. And then, just from a timing perspective, when do you expect to have at least the vast majority of the subscriber base rolled over to the new price increase? Is that Q2 next year? Because obviously you've got a bunch of annual guys still in there that you still need to roll forward. But how does that kind of as a percentage of the base? How does it kind of where are you now and where will you be over the next couple of quarters?

James Colquhoun (CEO)

Sure. We should have circa 60% of our member base fully migrated over to the new pricing before the end of the year. The remaining maybe north of 60, the remaining 30%-40% will happen, like you said, because of the annual membership percentage in our legacy cohort. So this will be fully flushed through a year from now, but a majority of the price increase is going to be happening in this Q4. And so that we'll see a majority of that impact for the full year of 2025.

Jirka Rysavy (Executive Chairman)

Yeah, Mark. So basically, as James says, most of it is now because all the monthly members, and we have about half of the members are annuals. So then firstly, the 40% pretty much equally spread over next three quarters.

Mark Argento (Analyst)

That's helpful. And James, you had mentioned Marketplace is kind of launching or relaunching in Q4. It looks like you have a pretty busy calendar for some live events. What's your expectations for Marketplace and, I guess, Gaia+ as you roll not only Q4, but next year? How the breadth of offering there, how aggressive are you going to be in terms of marketing into your fairly large 800 thousand+ subscriber base?

James Colquhoun (CEO)

Sure. With regards to Marketplace, we officially launched it in August. So Q3, we had a partial contribution there. For Q4, it'll be our first full quarter of contribution. And we don't typically share independent data based on these business units. And what I will say, though, is that Marketplace will cross sort of P&L positive in terms of revenue per quarter and cost of headcount per quarter around middle of next year. And from that point onwards, we'll be scaling it out. With regards to Gaia+, the premium membership tier, what we're seeing is that that's outpacing our total membership growth at about 3x-4x. So we're growing that at a faster rate in comparison to the total member count.

What that's doing along with the price increase is we're really pivoting the organization, I would say, strategically to focus more on ARPU as well as total subscriber growth. That ARPU and revenue growth is sort of the key focus for Ned, myself, and Jirka.

Mark Argento (Analyst)

That's helpful, guys. I'll hop back in the queue next quarter.

James Colquhoun (CEO)

Thank you. Thanks, Mark.

Operator (participant)

Thank you. The next question is from James Sidoti with Sidoti & Company. Please go ahead.

James Sidoti (Analyst)

Hi, good afternoon. Thank you for taking the questions. I heard you mentioned two events this quarter. Will there be more Marketplace or more Gaia+ events in the fourth quarter?

James Colquhoun (CEO)

Hi, Jim. It's James here. So these two events will be our last events of the year. And then we'll kick off again next year with new events. So this year, we'll have the most events that we've ever run in one year. And we're seeing great attendance. And like I mentioned to Mark, we're seeing the premium tier growing at a great clip, especially from member upgrades, which is a good sign for us. So yeah, just one more event to go, and we had a sold-out event just recently.

James Sidoti (Analyst)

Do the price increases, do they impact the Gaia+ membership, or were they for the standard Gaia memberships alone?

James Colquhoun (CEO)

Currently, it's just for the standard Gaia memberships alone. We have been leaning into the Gaia+ premium tier in terms of production of content, like I mentioned, with the most events this year. As we look to 2025 and beyond, we will be revisiting the price point for the premium tier once we build out the on-demand library accessible to those members.

James Sidoti (Analyst)

And can you talk a little bit about what your expectations are for Marketplace? When do you, I know you said you think you expect it to be profitable by the second half of 2025, but when do you think it'll really kick in and be a significant contributor to revenue?

Jirka Rysavy (Executive Chairman)

This is Jirka. We look at the place as a first step of community. We want to introduce the community full-blown in first quarter 2026. So we want to have marketing because it takes some programming to kind of get it incorporated in our system with all the experiences. It's just kind of new. So the goal is to make it profitable in the middle of this year. And so the next year, when we launch full community, it would be a full contributor to the community, of course, also to revenue of Gaia.

James Sidoti (Analyst)

Okay. And the launch of community, that would include the Igniton launch as well, I'm assuming?

Jirka Rysavy (Executive Chairman)

Hopefully, the Igniton launch would be before that, then somewhere later in the year this year.

Ned Preston (CFO)

Yeah. So just to clarify. Hey, Jim, it's Ned. Just want to make sure that that's clear around the timing of Igniton. That will be middle of 2025. So probably June 2025 is what we're shooting.

James Sidoti (Analyst)

Okay, and your Free Cash Flow positive again. Do you think this trend continues? Do you think that you'll need to go out and raise any capital in the near term, or do you think you'll be able to sustain your growth with the existing capital or existing cash you're generating from the businesses now?

Ned Preston (CFO)

Yeah. So, hey, Jim, and this is Ned and James in your conference. So, I'm going to separate that into Gaia. I believe you're talking specifically about Gaia. So, no immediate.

Jirka Rysavy (Executive Chairman)

Is it Gaia?

James Colquhoun (CEO)

Is it Gaia or Igniton you're asking about?

James Sidoti (Analyst)

No, Gaia. No, Gaia. For the Gaia business.

James Colquhoun (CEO)

Yeah. Got it. Yeah. So with the.

Jirka Rysavy (Executive Chairman)

The Ignitan?

James Colquhoun (CEO)

Yeah. Yeah. So, with the, as we said, six quarters in a row of generating Free Cash Flow, we don't have a need to go out and raise cash at this time. With that being said, similar to what we did almost exactly 12 months ago, 13 months ago of doing a raise, we always look for opportunities, but no immediate plans to do so.

Jirka Rysavy (Executive Chairman)

Yeah. We're planning to refile our S-3, which expired this year, as we always do, but we don't have an immediate plan to do anything.

James Sidoti (Analyst)

Okay. Thank you.

James Colquhoun (CEO)

Thanks, Jim.

Operator (participant)

Thank you. The next question comes from Thierry Wuilloud with Water Tower Research. Please go ahead.

Thierry Wuilloud (Analyst)

Yes. Good afternoon. Just a question on the mechanics of the price raise. If you can kind of give us a bit of a sense there. How does that you reached out to your members, and then do they have to do something, or they just don't have or as long as they don't do anything, nothing happens? I'm just curious how that how you implemented that.

James Colquhoun (CEO)

Hi, Thierry. It's James here, so around the world, different countries have different legislation when it comes to increasing prices. A vast majority of the world is what's called non-consent, whereby you send an email notification to the member 30 days before the price increase, and it increases unless they go and actively unsubscribe. Now, there's a very small amount of territories that are consent mode where the members need to actively approve the price increase. This stage for the increase, we're focusing on non-consent countries, and we'll be adding the consent countries as we move into 2025. It's just a larger dev lift on our engineering team, but so far, as we've been sending out the notifications and comparing it to our test project in the United Kingdom, the results are very encouraging.

It gives us a sense of that we have pricing flexibility in the market given the aggregate of niches that we serve. Yeah, we're excited for its impact on revenue so that we can continue to expand the brand and reach more members as we grow.

Thierry Wuilloud (Analyst)

Okay. And then maybe just a question on Gaia+. How do you translate that into the live event? How do you translate that into maybe increasing Gaia+ membership or just increasing in overall new members also? How do you integrate the event with your marketing program?

James Colquhoun (CEO)

So Thierry, we typically use the live events as a promotional opportunity for Gaia. Not only does it accentuate the community element of our mission by bringing people together at our GaiaSphere Event Center here in Colorado, but it also adds a tangibility to the experience of Gaia. And this often encourages many members to upgrade and also people that are new to the brand to have an experience with Gaia and then considering joining. And we've seen with the accelerated events that we've run this year that we're growing Gaia+ premium membership at an increasing rate, and it's healthy for the long-term economics of the business.

Thierry Wuilloud (Analyst)

Great. Do you have any numbers you can share in terms of how many attendees online or just any color around that?

James Colquhoun (CEO)

With regards to the membership base, like I'd mentioned to Mark, we are growing that at 3x-4x the rate of our overall member growth. So that's a really encouraging sign. In terms of the livestream attendees, we open specific events wider for promotional activities like we did in March of this year with the Immersion Conference. We had over 52,000 unique livestream attendees. We likely won't be offering the same level of open experience until Immersion again next year. And so I can report more once we've completed that event, which we're already selling tickets for.

Thierry Wuilloud (Analyst)

Okay. Great. Thank you very much.

James Colquhoun (CEO)

Thanks, Thierry.

Operator (participant)

Thank you. Ladies and gentlemen, a reminder to all the participants, you may press star and one to ask a question.

Jirka Rysavy (Executive Chairman)

Okay. There are here no questions. I would like to thank you for joining, and we look forward to speaking with you when we will report our fourth quarter results in March. Thank you.

Operator (participant)

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