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GAIA Gaia

Participants
Jirka Rysavy Founder, Chairman & Chief Executive Officer
Paul Tarell Chief Financial Officer
Darren Aftahi ROTH Capital Partners
Eric Wolf B. Riley Securities
Mark Argento Lake Street Capital Markets
Peter Rabover Artko Capital
Call transcript
Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia Inc.'s Financial Results for the First Quarter Ended March 31, 2021.

Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell.

Following some prepared remarks, we'll open the call for your questions.

Before we get started, however, I'd like to take a minute to read the Safe Harbor language. The following constitutes the safe harbor statement under the Private Securities Litigation Reform Act of 1995. The matters discussed today include forward-looking statements that involve numerous assumptions, risks and uncertainties. These include, but are not limited to, general business conditions, historical losses, competition, changing consumer preferences, subscriber costs and retention rates, acquisitions and other risks and uncertainties detailed from the time in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements. And with that, I'd now like to turn the call over to Gaia's CEO, Jirka Rysavy. Please go ahead.

Jirka Rysavy

Thank you, and good afternoon, everyone.

So 2021 is off to a great start.

We continue to execute against our plan of consistently growing revenue whilst generating positive net income and the cash flow.

So revenue for quarter increased 30% to $18.9 million as we crossed the 750,000 member milestone. Gross margin increased to 87.1%. And even with the 30% growth through revenue, operating expenses stay flat in dollars, which obviously improved significantly as the percentage of revenue to 85% from higher known 9% a year ago. This big improvement was driven by a 39% increase in gross profit per employee to 531,000 from 382,000 a year ago. EBITDA grew $35 million to $35 million or 19% of revenue from a loss during the year ago quarter. We generated net income of 350,000 or $0.02 per share, and cash flow from operation of $5.2 million. And Paul will talk more about these numbers.

Paul Tarell

Thanks, Jirka. Revenues for the first quarter increased 30% to $18.9 million, with gross margins, also improving to 87.1%. This marks our fourth consecutive quarter of revenue growth over 20% while generating positive EBITDA. We ended the quarter with 750,100 members, which keeps us on pace for our target revenue growth of 20% plus for the year, while maintaining profitability and positive cash flows. Beginning in October 2019, we experienced a shift in the initial plan selection for new members from 10% to 30% selecting the annual plan. Members on annual billing represent a core upsell opportunity for our $299 Premium live access annual plan, which we will now begin promoting more aggressively. Total member acquisition costs during the quarter were $7.6 million or 40% of revenues, which was improved from 52% of revenues in the year ago quarter. We did see some relief during the quarter on the pricing in the digital advertising market, which allowed us to bring our per customer acquisition costs in line with the prior year quarter at $68. We recently hired our new SVP of sales to build on the recent early traction in our member driven growth initiatives. She will be focused on growing our member Ambassador sales team to go after our sizable global market opportunity. Selling and operating expenses excluding marketing and member acquisition costs in the first quarter were $7 million or 37% of revenues, which improved from 47% of revenues in the year ago quarter. Corporate and G&A expenses in the first quarter were 1.5 million in line with the year ago quarter. EBITDA improved to $3.5 million or 19% of revenues in the quarter from negative 0.2 million or negative 2% of revenues in the year ago quarter. This marks our fourth consecutive quarter of generating positive EBITDA and puts us on an annualized EBITDA run rate of $14 plus million, which is almost double the full year 2020 EBITDA, which we generated net income of $0.4 million or $0.02 per share during the first quarter of 2021, which is an improvement of $4 million from a net loss of $3.6 million or $0.19 a share in the prior year quarter. This increase reflects the fact that most of the incremental gross profit generated in the first quarter of 2021 compared to the prior year quarter flowed through to net income. Cash flow from operations increased to $5.2 million during the quarter and improvement of $3.2 million from Q1 2020 and our sixth consecutive quarter of generating cash flows from operations. We increased our content investment during the quarter as planned, while also increasing our overall cash balance to $13 million. With 80% of our monthly viewership going to our original programming, and our end to end content production fully in house, we have been able to control the cost on a per hour basis to ensure that our new content is providing a high return on investment, given our current member levels.

With the significant improvements we have made in our operational performance over the past two years, and the financial stability we have created with the sale of a portion of our corporate campus in September 2020 and the predictability of our cash flows going forward.

Our board has authorized a 5 million share repurchase program, as announced in our earnings release we filed this afternoon. This will provide flexibility as we look to optimize return on shareholder capital, as we continue to focus on growing revenues, operating margins and cash flows. With that, I would like to open up the call for questions. Operator?

Operator

[Operator Instructions] And our first question will come from a line of Darren Aftahi with ROTH Capital Partners.

Darren Aftahi

Hi, guys, thanks for taking my question and nice job in the quarter. Three if I may, just one. Paul, you talk about annual adds or annual mix. I'm just curious that stayed consistent on the annual plan at 30% in the quarter.

Second one looks like ARPU ticked up.

Just wondering, is there any movement from the premium live events business yet? Or is that more of a second half of the year? And then you talked about or reiterated your 20% kind of growth objectives for this year? Just kind of curious your thoughts on operating leverage versus growth? And if it's more skewed towards operating leverage, it looks like your costs were fairly flat.

So should we think about the business is growing 20% and modest, if any operating costs growth and is that the right way to think about your business in 2021? Thanks.

Paul Tarell

Sure.

So just take them top to bottom, the annual mix has been relatively consistent, absent a few promotional things that we do to push the annual plan given certain times of year like around Thanksgiving and the holidays. But yes, it's been pretty close at that 30% level since we made that shift back in October. From the ARPU perspective, actually, my numbers show a slight tick down in Q1 from where we were in Q4. But to answer your specific question, the live events are not going to be a meaningful contributor to revenues this year, likely because we're limited at a per event capacity of about 50 people.

So that ticket revenue is not going to be that interesting. But what we are focused on is building on the $299 annual premium digital subscription, which I mentioned in my prepared remarks. But it'll take a little bit of time to build so it didn't meaningfully contribute in Q1. And we expect it to help out in the second half of the year. And then in terms of the operating leverage, a lot of what we focused on through 2020 was getting over the hump to generating net income and overall cash flows. And we did that in July as planned. And then we kept our headcount and expenses relatively flat through basically February. We had six people start in March and so that's not reflected in the full quarter operating expenses. But what I will say is we're focused on staying net income positive and generating cash flows, but not being happy with future year's revenue growth of only 20%.

So we're going to start investing, as we've mentioned, on the last call in those growth areas, which will require some incremental headcount.

Jirka Rysavy

I'd like to add to it.

So when you look at the gross obviously, we went from our marketing as percentage of revenue being, you know, historically in 120% of revenue to down to 60%, then 50%, 56%; now we're at 40%.

So it's really the goal is to obviously bring the cost of acquisition or marketing costs down while are we growing 20% plus, obviously, first quarter 30%. But we want to kind of continue to bring the cost of down but we want to kind of invested in this ambassador, the member driven growth model, as we talked about it starting next year, so we want to get these numbers higher, but keep the marketing cost dropping as a percentage of revenue.

Darren Aftahi

Thank you.

Operator

Thank you.

Our next question comes from Eric Wolf with B. Riley Securities.

Eric Wolf

Thank you. Good afternoon, everyone. A couple of questions as well, if I may, I guess, one. How should we think about the strong core and subscriber numbers, were those more a function of a more efficient spend and subscriber additions or a reduction in churn?

Paul Tarell

The combination of both.

I think when we look at the quarter, and we look at what happened a year ago, we didn't really start seeing the benefit of the “lockdown” signup volume until the back half of March.

So Q2 is going to really be the quarter that we see that big wave that we saw from the year ago.

And so this subscriber ad was in line with our expectations, I know, it's probably a little bit ahead of where your numbers had us. But as we think about the quarter that we're going to have a challenge, it's going to be Q2 just given the volume of renewals that we have. And historically 2020 as an anomaly, Q2 has been the softest quarter from a net adds perspective, if you look back over the historical years, but all that being said, we're still confident in our ability to be able to drive 20% revenue growth for the year, while maintaining positive net income and cash flow.

So even if there is a little bit of headwind in Q2, we're not too worried about it based on where we are now.

Jirka Rysavy

We going to start to get a little more from our recall live access to premium subscription is $300 a year.

So there is, you know, more focus on that then getting let's say push some other way of the memberships.

So we really kind of like that to make the $300 push.

So revenue or members might separate little bit, but generally we very pleased where what actually happened, you know, we kind of were not sure, which we kind of saw this different reports on market, but actually came for us even the end of the quarter was pretty good.

Paul Tarell

Yes.

So just to give that in a sound bite. Jirka, what he said is we're focused on migrating more members up to that higher ARPU $299 plan and focusing on specifically sub growth if the markets not there for us to take advantage of it during the summer.

Eric Wolf

Okay. And then, you talked about seeing some relief in advertising rates, I guess, what are you expecting going forward in technically change or shift and how you allocate your spend across various channels, because of it?

Paul Tarell

Yes, we manage all of our spend in house, we don't put any of it out to an agency.

So it allows us to be very nimble and take advantage of any day to day trends that we're seeing.

And so we've reduced our dependency on our predominantly largest source of traffic from down to you know, sub 15%. And that gives us a lot of flexibility as we try to optimize our spend. Generally, I would say where we are right now is the per subscriber number that I feel comfortable with a plus or minus 10% on either side of it being able to do what we're trying to do. And we made it through the toughest period, which was Q1 with the “reopening” trade happening. And you've probably seen all the headlines about the digital ad market, after Facebook and Google and the big platforms released and their expectations that more and more money is going to be moving online. The benefit for us is we're very targeted and who are going after, so we're not trying to just spend X amount of money, we're looking at the conversions and we can do that very effectively.

Jirka Rysavy

And also, you know, by basically focusing on the $300 live access, it obviously our goal is to generate more cash. And as well, I mean, it's generally more income and cash.

So if you kind of look at the percentage of the incremental growth, so annual growth, what's driving to do our pretax line, it's pretty high, you know, kind of expect this year somewhere 50% to 60% of incremental gross to drop to bottom. We even have a little more last year, and but a lot of that is kind of increase because the cost of acquisition for the customer at $300 is not that different, as is for the regular subscriber.

Eric Wolf

Got it. And final question, I guess, as the kind of more aggressive move into international market impacts your planned media spend versus current levels? And how do you plan going forward to focus your budget on media spend in terms of your subscriber revenue growth trends [ph]?

Paul Tarell

When you say me media, you mean our content?

Eric Wolf

Yes, content. Yes, sorry.

Paul Tarell

Yes.

Okay.

So when we gave the guideline last call that we're looking at ramping up to about 20%, of revenues being spent on content, investment, which as we continue to scale means that as we exit this year, the additions to the content investment library should start to approximate what we're bleeding off each month through amortization. And that's a targeted focus of the model.

And so then the question gets down to how do you allocate that spend to the different languages, what we learned from our growth into the Spanish market over the last three years is we have an opportunity to go and license or acquire really good content for lower per our costs than we would likely be able to do it ourselves.

Given that we'd have to identify someone over there to do it for us.

So one of the areas that we're looking at is, is there library investments that we can make, which again, is exactly how we played it with the Spanish language.

And so it'll be opportunistic from that perspective. And Jirka might have a few things to add?

Jirka Rysavy

Well, yes, it's like, the cost is roughly same, you know, if you go do it ourselves or acquire it, so it's, we can probably do it a little cheaper actually, if we do it ourselves, but takes longer.

So it's kind of an opportunity to be prepared to do both. None of them are really significant numbers.

As we, for 2021, it's, again, create the basis, we don't expect a lot of growth from those country this year.

Paul Tarell

A general cost per acquisition on those markets is lower than United States.

Operator

[Operator Instructions] Our next question comes from Mark Argento with Lake Street.

Mark Argento

Good afternoon, guys.

Just wanted to -- just kind of philosophical, your thinking around, you know, buyback versus growth or road capital and thinking about spending on customer acquisition versus the buyback you put in place, what's the criteria or the thought process there? And that I just want to make sure that when you said $5 million or 5 million shares. Thanks.

Paul Tarell

Mark, so yes, it's 5 million shares. The purpose of putting that in place was really to re authorize management to have a buyback in place. We've had one historically in place for many years, and it just lapsed as we made the transition over to Gaia.

So we wanted to get that back out there for optionality sake.

As we look at the world into the future, we see much rosier horizon on investing for growth, then pulling back even more float from the public market. But that being said, there are periods of time where it skews so heavily into the favor of doing a share repurchase, because of the market dynamics that we wanted to be able to have the flexibility to be able to do that. But our primary focus is going to be on growth capital and driving incremental growth above 20%. Not necessarily by spending more on marketing, but by spending more on these other initiatives, member driven growth and professional Ambassador groups, the international expansion into French and German and potentially other languages as we look out into the future years, and then really about reducing our overall dependency on paid media, to drive our growth so that we can decouple the growth rate from our spend. But again, it was put in place from an optionality perspective, not because we want to necessarily start reinvesting heavily in shrinking the float anymore, but it needs to be there because it is a necessary tool in my toolkit as I think about balancing shareholder return almost year ago [ph].

Mark Argento

That's helpful. Then thinking about additional channels or content. Any other roadmap or additional channels that you guys are thinking about launching and then telling them about the opportunity for M&A and maybe some tuck in acquisitions on the content side?. How do you guys think through that?

Paul Tarell

Yes.

So we're focused this year on what I would call connecting the dots between our existing topics so that we can understand based on the work that we're doing with our member journey, analysis that our data and engineering and product teams have been looking at to understand where can we create, we'll call it filler pieces of content to connect our vast and deep library of content before we need to look at expanding into other verticals. That being said, we are also looking aggressively internationally to see if there's opportunity to bring in 500 or 1000, native language titles in French or German, or Spanish, because we see the benefit of doing that based on how we grew our Spanish audience with a relatively efficient content spend. And then it allows you to go to market and as you're already alluded to the per subscriber acquisition costs in those new markets is significantly lower than it is in the US because there's not so much competition.

Mark Argento

That's great. And congrats on a solid quarter.

And so fun to watch you guys execute. Thanks.

Operator

And our next question comes from Peter Rabover with Artko Capital.

Peter Rabover

Hey, guys, I think you answered most of my questions on the one, but I'm just curious. What's your media budget for the rest of the year?

Paul Tarell

The content again, is that what we're referring to?

Peter Rabover

Yes.

Paul Tarell

Yes, that's okay. Generally, I would say Q1 is a little higher than other quarters just as we renew a lot of our ongoing shows.

So generally, you could look at Q1 as being a reasonable proxy for the rest of the year, as revenues continue to grow.

So I think we were $4 million and change for Q1.

So you can just analyze that.

Peter Rabover

And then, you have in the buyback; is there a price where you would buy more or do you guys have some sort of strategy with that?

Paul Tarell

No comment on the price. But I think I alluded to the strategy on the on Mark's question is really, as we look at our internal analysis and understanding of what drives shareholder value, we want to make sure that we had something in place that we could take advantage of dislocations in pricing, whatever that may be. And it's not a static equation, because it's also looking at what is our other investment opportunity on the horizon. Because with our cash flows from operations, where they are, Q1 over 5 million a quarter, we have quite a bit of flexibility, particularly understanding that content investment is almost 100% discretionary from period to period for us to look at where we would want to put that incremental cash.

Peter Rabover

Great. Well, thanks so much for answering the questions. Congrats on a good quarter.

Paul Tarell

Thanks, Peter.

Operator

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

Jirka Rysavy

Thank you, everyone, for joining us. And we look forward to speaking with you when we will report our second quarter somewhere in early August. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.