Gaia, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaia, Inc.' 's financial results for the fourth quarter and full year ended December 31, 2022. Joining us today are Gaia's CEO, Yurka Risavi, and CFO, Paul Terrell. Following some prepared remarks, we'll open the call up for your questions. Before we get started, however, I would like to take a minute to read the Safe Harbor language. The following constitutes a 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, future losses, competition, loss of key personnel, price changes, membership growth, brand reputation, changing consumer preferences, customer acquisition costs, member retention rates, acquisitions, and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q. GAIA assumes no obligation to publicly update or revise any forward-looking statements. With that, I would like to turn the call over to GAIA's CEO, Yurka Rizavi. Please go ahead.

Thank you, and good afternoon, everyone. I'm glad that I can report some positive news. After the challenging 2022, when both revenue and adjusted EBITDA increased only in single digit due to COVID lockdown members' cleanup, we have already seen overall member growth in 2023. Growth came from our direct membership, while the third-party providers like Amazon were still negative in January and February. In 2022, revenue increased 3% to $82 million from $79.6 million in 2021, and member count ended December 31st at 759,000 members. Gross profit for 2022 increased to $71.1 million, or 86.7% of revenue, up from $69 million in 2021. adjusted EBITDA increased to $17.5 million from $16.8 million in prior year. During the last few months, we have eliminated over $5 million in annualized spending, which included approximately 36 headcounts, mostly contractors. They were added over the last two years to offset the reduced efficiency we experienced as a result from kind of work-from-home mandates. We expect to see the benefits of this savings to begin in the second quarter. Our efforts in French and German markets started to generate meaningful results, and we also signed new agreement to launch Gaia on Amazon Mexico, and Gaia also became part of new Google subscription venture YouTube Primetime. End of end of second quarter 2023, we also plan to launch a Gaia marketplace, focusing our existing member base to increase ARPU and revenue with only minimum marketing expense. Paul will now talk to you about results.

Revenues were up 3% for the year with fourth quarter revenues of 19.6 million. Gross margins improved for the fourth quarter to 86.7%. from 85.8% in the year-ago quarter. For the year, gross margins of 86.7% were relatively consistent with the prior year. As we continue to invest in and release new content, particularly to support our growing language expansion efforts, we have increased our viewership on the exclusive portion of our content library to over 85%. We expect content amortization to bring expected gross margins down to the 85% level in 2023. Total member acquisition costs during the quarter were $7.7 million, or 40% of revenues, compared to $8.2 million, or 39% of revenues in the year-ago quarter. Despite the seasonal headwinds we typically experience during the holiday season, we were able to reduce our per customer acquisition costs by approximately 10% from the prior year quarter, which led to growth in our direct member base during the fourth quarter. We did, however, continue to experience net member base contraction in our larger third-party distribution partners leading to an overall decline in our member base during the quarter. Based on third-party analysis we receive, this third-party trend is not GAIA-specific. Selling and operating expenses, excluding marketing and member acquisition costs in the fourth quarter, were $8.2 million, or 42% of revenues, which is up from the prior year due primarily to increased technology operating expenses. Corporate and G&A expenses in the fourth quarter were $1.6 million, or 8% of revenues, in line with the year-ago quarter. We have implemented significant cost reduction measures over the past few months, as Yurka mentioned, which we will begin to see the benefits of during the second quarter of 2023. We had a net loss of $0.9 million, or $0.04 per share, during the fourth quarter of 2022, compared to net income of $2.1 million, or $0.11 per share, in the year-ago period. The prior period reflected a tax benefit of $2 million due to a partial valuation allowance release triggered in connection with our acquisition of Yoga International. For 2022, we had a net loss of $3.1 million, which included an anticipated $2 million settlement accrual with the SEC that we announced with our third quarter 2022 results and the related legal fees. We are awaiting final approval from the Commission on the proposed settlement and have no further updates at this time. With the proposed settlement, we anticipate our ongoing legal fees related to this matter will no longer be a headwind on earnings. Excluding the anticipated settlement accrual and related legal fees, we had slightly positive net income for 2022. Adjusted EBITDA was 3.9 million or 20% of revenues in the quarter compared to 4.1 million or 20% of revenues in the year-ago quarter. Adjusted EBITDA for the full year was 17.5 million or 21% of revenues compared to 16.8 million, or 21% of revenues in 2021. Now that we have worked through the rapid growth and subsequent declines in our member base as a result of COVID, our working capital cycle has stabilized, and we expect to begin to benefit from the negative working capital generated from our members' upfront subscription payments. We will also benefit from the $5 million in reductions that Yurka mentioned on our expenses, and we'll be in a position to begin generating cash flows from operations in excess of the cash flows we reinvest back into our content library and product enhancements. We expect this to allow us to begin generating cash flows during the year and provides flexibility for us to reinvest those cash flows for future growth or withstand a future downturn in the macroeconomic environment. We spent the past year adjusting to a rapidly evolving post-COVID environment to get ourselves back to a place of financial independence. rolled out our business continuity initiative to gain technological independence, and are now focused on creating growth drivers to allow for marketing independence and sustained growth of revenues and cash flows. With that, I'll hand it back to Jurka for some closing remarks.

Yeah, just for the summary, I want to say we have no net debt, and the replacement value of the over 10,000 titles we fully own with the future cash value of our customer base. It's well over $300 million. And our cash balance as of December 31 was $11.6 million. And during 2023, we expect the business to generate about $7 to $9 million of new cash. With that, I want to thank you, everyone, for joining. And we will look forward to speaking with you. Thank you. Yeah. On June the 23rd, I want to open it for questions, obviously. Operator.

Thank you. And at this time, we'll conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number 2 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. Once again, to ask a question, press star 1 on your telephone keypad. We'll pause for a moment while we pull for questions. Our first question comes from Mark Argento with Lake Street Capital. Please state your question. Good afternoon, guys.

I just wanted to drill down a little bit on the $7 to $9 million in free cash or cash generated that you're anticipating for 2023. What kind of subscriber growth does that contemplate? Just wanted to better dial that number in a little bit.

Well, we're going to really focus on the kind of subscribers stay longer, but let's say that we want to be ahead of our peak, so before we lost any COVID customers, so we expect to grow above that, but also to really launch the Gaia marketplace, which basically allows... the members to purchase different, mostly non-tangible services when Gaia keeps percentage. And so we did a survey to our customer base and over half of our customers are, you know, interested to participate. So those are between those two is this free cash flow generated. And so, you know, it's... We expect to launch the GAIA marketplace like end of the second quarter.

Yeah, I'll jump in a little bit. So we're really focused, given how challenging the new customer acquisition has been with the changes that are constantly evolving in privacy and online advertising, we're really focusing on trying to increase average revenue per user of our existing member base that at this point now has become very seasoned and sticky and looks to GAIA for guidance. in terms of what content they watch, but now we see an opportunity to expand that into other, as Yurka mentioned, non-tangible and potentially tangible goods that fit into our ethos. We did evaluate looking at an AVOD model, which is what a lot of the other streaming players have moved into, and for us it's really not interesting given our brand ethos and the majority of advertising revenue coming from brands and industries that we wouldn't want to take money from. So we've really focused on how do we add value back to our members and allow it to then generate cashflow and incremental revenues without focusing so much on the new customer acquisition cycle that we've depended on over the past few years.

And also our direct members still represent over 80% of the business. We always want to keep the third party below 20. And I think that's actually going to be a big advantage at this point because our direct members started to grow and the third party is still kind of lagging. Even in the beginning of March, we actually saw first-time growth from the third party. So maybe we can be more optimistic than we were two weeks ago about third parties. But it's our direct business what we expect to really grow this year.

So the seven to nine, does that contemplate growing the overall subscriber base? Yes. Go ahead.

Well, I think that it's what Yurka just mentioned at the end there that he added. I think it's important when you think about it from a member-based perspective that we understand that our direct members are at our full retail price, where our third-party members are at net revenue price. Depending on the partner, let's just call it anywhere between 40 and 60% net revenue. Once you account for transaction processing fees, et cetera. So it's not necessarily about the member count and the member growth solely. It's about the revenue, the net income and the cashflow generation that comes off of the direct business is what we're focusing on. We have less control over our third party distribution partners. And as I mentioned in our prepared remarks, our largest partner, we've seen contraction. And it's because they have a paywall to get to the gate to be able to sign up for incremental subscription services behind it. And as we get into a questionable external macroeconomic environment, we can't control how those work. So we're really focusing on the things we can't control, which is our direct business, which is actually more profitable and stickier in the long run for us.

And I also said that we expect to not only offset the loss when we have this COVID cleanup, but we expect to get above our peak, post-COVID peak on the members.

Yeah, that's helpful. And just to clarify, so you said roughly 80% currently of your sub-base is direct. Is that a good number to use?

uh we measure it in revenues i yeah we always try to keep the direct members between like 15 and 20 percent of revenue and it's right now let's say 18 or something on that range and we'll probably decline a little bit as a percent the third party i think direct business will grow faster than um the third party members all right that's helpful thank you guys

Thank you, and a reminder to the audience to ask a question press star one on your telephone keypad. To remove yourself from the queue press star followed by the number two. Our next question comes from Thierry Willaud with Water Tower Research. Please state your question.

Thank you. Good afternoon. Maybe first a question on the savings that you mentioned. Is that basically an unwinding of maybe inefficiencies that were caused by COVID and the inability to work at the office? Or am I reading that correctly?

No, it's correct. You know, as the COVID came, we have this work from home mandate where we have to keep at least half of employees not being in office and you know, that kind of get a little bit in the habit. So we finally kind of terminated that. And it's, you know, the inefficiency of the work from home was, you know, close to 30% like everybody else. And so we kind of, with eliminating those things, we could basically eliminate close to 20% of the headcount. So that's really most of the saving. There's some other really big expenses with Canvas reducing your headcount as well. But most of it is the purely salary and overhead related with it.

Okay, great. Then you've mentioned, you know, maybe the COVID bump and losing some people who signed up just during COVID. But I'm wondering if you look at the foreign language, has that dynamic there been the same or is there a different dynamic between your English language subscribers and the French and the German subscribers that you mentioned? Are you on a different trajectory with these subscribers?

Yes, we are on a different trajectory because we didn't really meaningfully launch marketing on those languages until this past summer. We didn't have the rapid growth and deflation like we saw on the English side. It's really been accretive in terms of net new subs. And when you look at it off of a small base, obviously the percentage is much higher than the overall business. So we've seen positive developments there in French and German. And as Yerker mentioned in his prepared remarks now, we've actually been able to get Amazon new languages and new markets interested in rolling Gaia out. And what we have seen historically over the last seven or eight years is that third party growth typically comes when you launch with a new region or a new distribution partner. And the launch timeline is entirely out of our control. So we don't try to bank on when those members are going to come online. But we have signed with Amazon Mexico and we're getting ready to launch with them. We're in discussions with Amazon for a couple of other regions in South America. And then we also have some preliminary discussions with them for New Zealand and Australia region. So that could be accretive, but it's not a primary focus.

But also we kind of really kind of little step on the pedal a little bit, you know, this year in especially French and German markets, because so far most French and German markets have lower acquisition costs and lower churn. So actually be moving some more money to those region markets. But there's definitely a limit how much we can grow there from the overall spend. But there are definitely positive developments in it for last quarter.

So these markets, do you also have a mix of direct subscribers and indirect? Or are the channels somewhat comparable to the English-speaking subscribers? Or are they more geared towards the Amazon and indirect in general?

Absolutely. So for French and German, it's direct. There's no third party distribution partners. It's all direct for French and German. And Spanish is the same as it sits now. And as I said, the only distribution agreement that we have for Spanish at present with no activity yet because it hasn't launched is Amazon Prime Video in Mexico.

Okay. You briefly mentioned YouTube. What should we focus on in terms of the third-party distributors? Is it the YouTube efforts? Is it the Amazon efforts? Any color there?

Yeah, I'd say we've talked about Amazon pretty at length here. They're contracting overall in general when we look across all their premium channels. And absent the last month or so, that's the trend that we've seen. there on the YouTube update. We did launch with them in November. However, they still have some kinks to work out on their side. So we're not quite where we expected to be in terms of our ability to promote and market on YouTube that offering yet. But I'm being updated weekly from the teams and they're making rapid progress there. So we'll see when it's really ready to roll in terms of our ability to deploy full marketing and promotion efforts there but it it should continue to drive into the future particularly once they get the u.s region figured out they have uh pretty ambitious plans to roll out to other countries and languages and our agreement with them allows us to go along with them if we choose okay great well some some top line growth and and reduced expense space that should be uh

Hopefully that will make for a good year. Thanks for answering my questions, guys. Thank you.

Thank you. And at this time, this concludes our question and answer session. I would like to turn the call back over to Mr. Rizavi for closing remarks.

Well, thank you, everyone. And we look forward to speaking with you in early May when we report our first cue. Thank you very much.

Thank you, and that concludes today's conference. I'll pardon any disconnect. Have a great afternoon.