Gaia, Inc.

Good afternoon. Welcome to GAIA's 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Joining us today from GAIA are Yerkar Asave, Executive Chairman James Colhorn, CEO, and Ned Preston, CFO. After the speaker's presentation, 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 expectation of 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, your current survey. Thank you and over to you.

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 above quarter. Member count grew at the same period by 7%. The third quarter was our sixth consecutive quarter of positive operating and free cash flows. 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. And James will now speak more about other advances in the business.

Hello, everyone, and thank you, Yurko. As mentioned, for the first time in Guy'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 UK 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 it 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 signup, 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 Gaiosphere events, including our largest ever ancient civilization conference and our sold-out Gene Keys event. We're thrilled to see even more enthusiasm in Q4 with a 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 Eleven Labs 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 Eleven Labs' 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.

Thank you, James. Turning now to our financial results for the third quarter, ending September 30, 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 of 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 negative $0.05 per share compared to the year-ago quarter at negative 8 million or negative 4 cents 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 Juerka for his closing comments. Juerka?

Yeah, so for the summary, we expect increasing annual revenue growth rate, this continuing growth of ARPU, which will be supplemented by the price increases as well. We obviously want to continue increasing gross profit for 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.

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.

Hi, guys. Good afternoon. I was wondering if we could dig down a little bit on when you took the price increase, kind of what did you see Did you get some initial churn that I moderated, or maybe you could just talk to kind of what the experience was there?

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. And 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.

It's helpful. And 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 the percentage of the base, where are you now and where will you be over the next couple of quarters?

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 to 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 period. and so that we'll see a majority of that impact for the full year of 2025.

Yeah, Mark, so basically, you know, 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 the next three quarters.

Yeah, that's helpful. And James, you had mentioned marketplace 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, you know, marketplace and Gaia, I guess, Gaia Plus, you know, as you roll, not only Q4, but, you know, next year? You know, how, you know, the breadth of offering there, you know, how aggressive are you going to be in terms of marketing in the year? in a fairly large 800-plus thousand subscriber base.

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 middle of next year and from that point onwards we'll be scaling it out with regards to Gaia plus the premium membership tier what we're seeing is that that's outpacing our total membership growth at about three to four X so we're growing that at a faster rate in comparison to the total member count and what that's doing along with the price increase is we're really pivoting the organization I would say strategically to focus more on our poo and as well as total subscriber growth, but that ARPU and revenue growth is sort of the key, is a key focus for Ned, myself, and Yurko.

That's all for guys. I'll hop back in the queue next quarter.

Thank you.

Thanks, Mark.

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

Hi, good afternoon. Thank you for taking the questions. I heard you mention two events this quarter. Will there be more marketplace or more Dyer Plus events in the fourth quarter?

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 one of the, for the total 24 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.

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

So currently it's just for the standard Gaia memberships alone. We have been leaning into the Gaia Plus premium tier in terms of production of content, like I mentioned, with the most events this year. As we look to 25 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.

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?

This is Yurka. You know, Marketplace is the 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 full contributor to the community, of course, also to revenue of Gaia.

Okay, and that the launch of community, that would include the Ignaton launch as well, I'm assuming?

Hopefully, the Ignaton launch would be before that, then, you know, somewhere later in the year, this year.

Yeah.

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

Okay. And you were free cash for 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? You're reducing cash you're generating from the businesses now.

Yeah, so, hey, Jim and Ned, this is Ned, and James and you can weigh in. So I'm going to separate that into Gaia. I believe you're talking specifically about Gaia. So no immediate. Is it Gaia or Ignaton you're asking about? No, Gaia.

No, Gaia.

Yeah, so with the, 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.

Yeah, we're planning to refile our S3, which expired this year, as we always do, but we don't have an immediate plan to do anything.

Okay, thank you. Thanks, Jim. Thank you.

The next question comes from Terry Woola with Water Tower Research. Please go ahead.

Yes, good afternoon. Just a question on the mechanics of the price raise, if you can kind of give us a little bit of 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 you implemented that.

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, you know, the results are very encouraging. And it gives us a sense of that we have pricing flexibility in the market given the aggregate of niches that we serve. And, 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.

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

So Terry, 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 Gaia Sphere 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 You know, we've seen with the accelerated events that we've run this year that we're growing Gaia Plus premium membership at an increasing rate, and it's healthy for, you know, the long-term economics of the business.

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

So with regards to the membership base, like I've mentioned to Mark, we are growing that at 3 to 4x the rate of our overall member growth. So that's a really encouraging sign. In terms of the live stream 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 live stream 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.

Okay, great.

Thank you very much. Thanks, Thierry. Thank you.

Ladies and gentlemen, a reminder to all the participants, you may press star and 1 to ask a question.

Okay, I hear 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.

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