The Beachbody Company, Inc.

Good afternoon. Thank you for attending today's the Beachbody Company, Inc. Third Quarter 2024 earnings conference call. My name is Jaylen. I'll be your moderator for today. All lines will be muted during the presentation portion of the call. For opportunity for questions and answers at the end. I'd like to turn the conference over to our host of the call. Please proceed.

Welcome everyone and thank you for joining us for our third quarter earnings call. With me on the call today are Mark Goldston, Executive Chairman of the Beachbody Company. Carl Dikler, Co-Founder and Chief Executive Officer. And Brad Ramberg, Interim Chief Financial Officer. Following the prepared remarks, we'll open the call up for questions. Before we get started, I would like to remind you of the company's state harbor language. Statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Predication Reform Act of 1995. Actual future results may differ materially from those suggested by such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC, which includes today's press release. Today's call will include references to non-GAAP financial measures such as adjusted EBITDA, net cash, and free cash flows. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. Now I would like to turn the call over to Mark.

Thank you for joining us today. I'll begin by discussing our recent announcement on the restructuring of the company and the major change to the business model. Then I'll review some highlights of the third quarter performance and then update you on the progress of our turnaround plan. Then I'll turn the mic over to Carl Dyckler, our CEO, to discuss our strategic initiatives in more detail, and that will be followed by our interim CFO, Brad Ramberg, discussing our financial guidance and outlook. As of November 1st of 2024, Bodies essentially become a new company from the one that previously existed. I know that's a bold statement, but it's emblematic of the massive change to our business model we affected, which has put Bodies in a position to be a dynamic and more nimble company in 2025 and beyond. I would ask all investors and the analysts to cover Bodies to take a fresh look at the company's new business model and try to avoid direct comparisons with the company that we had prior to November 1st of 2024. Let me briefly review what we've done to re-architect this great company and position ourselves for success going forward. First, we decided to eliminate the multilevel marketing or MLM structure that's been in place in this company since 2007. The MLM model is dated, cumbersome, expensive to operate, loaded with passive, non-performance compensation expense that's paid to other people other than those who actually sell the product, and it places a time management burden on participants who have to recruit, manage, and also sell, and it carries a negative stigma, which is seemingly associated with all MLMs, and this inhibits new customer signups and the attraction of new sellers. There clearly was a time when the MLM model worked extremely well for this company, and we greatly appreciate the efforts of all those who participated, but in today's world, we believe the single-level affiliate model is better suited to our business. The single-level affiliate model, which became effective on November 1st, has no upline or downline management tree, no recruiting of new seller requirements, and importantly, no sharing of commissions with other people. In the new body single-affiliate level model, everyone is in business for themselves. They're independent, they're not part of a team, and they keep 100% of the commissions they earn on everything they sell. No more sharing of commissions. This is a huge change, and it's one that provides all body affiliates with an uncapped -for-performance compensation model. It's really quite simple. The more you sell, the more you make, and you don't share your earnings with anyone, and there's no one to manage. So the affiliate model will result in a material improvement in our return on ad spend, lifetime value, and with our lower cost model, it'll significantly improve our economics. The incentive for new body affiliate sellers is pretty clear. In the affiliate world, where commission rates typically range from 5 to 25%, a body affiliate will earn much more than that with commission levels in the 35 to 50% range. This is a highly attractive proposition to the thousands of sellers who were previously in our network, as well as for the millions of affiliate sellers in the market today. The affiliate model just began taking signups on November 1st, and we're extremely pleased with the number of signups that we have to date. The new body business model features a multi-channel approach that's now unencumbered by the pricing and customer mapping constraints of the former MLM model. In addition to the new affiliate model, we have a dynamic direct response marketing unit of growing Amazon business, and we're developing new products in the nutrition segment under the P90X and Insanity brand names, which are expected to be introduced in 2025 and 2026 respectively, and will be sold in major retailers within the affiliate network and through our direct response business. Remember, body has never marketed any of our current nutritional supplements in our direct response business due to the pricing and customer mapping constraints of the former MLM model. Now that's all changed, and for the first time ever, we can actually market products like Shakeology, Energize, and the new product lines we're developing, where we can sell them direct to consumer through our direct response unit and then advertise them on Facebook, Google, TikTok, and YouTube, which we could never do before. Since my arrival as executive chairman 18 months ago, we've conducted a comprehensive turnaround. This involved a massive infrastructure change, and this resulted in a reduction of the company's cash break even level by several hundred million dollars from where it was in 2022. Today, we're a much leaner company that's poised to generate significant operating leverage when we achieve top line growth in the future as a result of the major reduction in overhead. Now let's take a look at our performance highlights of the third quarter. Our revenues were in line at the midpoint of our guidance, and we achieved extremely healthy gross margins, which improved by 880 basis points year over year. Adjusted EBITDA significantly exceeded guidance of 2 to 6 million by coming in at 10.1 million dollars. This is a massive $15.9 million improvement versus the third quarter of last year, when we posted a $5.8 million adjusted EBITDA loss. This marks our fourth consecutive quarter of positive adjusted EBITDA. Year to date, we generated $19.6 million of adjusted EBITDA. That is a $31.1 million adjusted EBITDA improvement from the $11.5 million loss in the prior year to date period. Additionally, we generated more than $5.3 million of positive free cash flow year to date, and that compares to a cash burn of $20.1 million from the comparable period. This reflects a $25.4 million improvement. The first phase of our turnaround centered on lowering our infrastructure costs and re-architecting our financial model. I'm pleased to report that our third quarter and year to date results demonstrate that we have successfully completed our goal by generating positive adjusted EBITDA and free cash flow. We've significantly reduced our gap net losses while dramatically lowering the cash breakeven level. Now we're entering the next phase of our journey, and this portion is focused on unlocking the top line potential. With that being said, I'd like to turn the call over to Carl, and he'll discuss our strategic initiatives as we move into the next phase of our transformation.

Carl? Thanks, Mark. The third quarter results are a great indication of how the company is navigating this turnaround and how disciplined the team has been in delivering on exactly what we've outlined. We know the demand is there. We know the opportunity is significant. As we've done for 26 years, we're determined to help people get fit and healthy. This mission is more important than ever, especially with the rise of GLP-1 drugs that require a healthy lifestyle to truly get the benefit of this new category of pharmaceuticals. So we're staying focused on execution. And as proud as I am of our third quarter results, our focus is now on helping our thousands of partners transition to affiliates, making this shift from network marketing productive for them and for the company. Let me give a little more color on the rationale of this transition because the 17 years we spent in the network were incredibly productive, but over the last two years, negative sentiment toward the multi-level model has made acquiring new customers increasingly difficult. We were running a bifurcated strategy where we de-emphasized our offerings on our primary -to-consumer website to drive customers to the network website called teambeachbody.com. Not only did this cause confusion and increased friction, but we also noticed that conversion rates on the team beach body site were significantly lower than our -to-consumer site. We have some of the best fitness programs and nutrition products in the industry, but we were creating an obstacle for the customer to purchase because of growing resistance to the MLM business model. At the same time, our field of partners were increasingly challenged to recruit new sellers and with managing their downline organizations, which took their focus away from the important work of selling and helping new customers get started. Likewise, the majority of our partners weren't optimizing their earning potential because their compensation was being shared and that resulted in declining motivation and productivity. By changing to an affiliate model, we're modernizing the way we sell by keeping our field of partners 100% focused on selling without the additional burden of recruiting and managing a team. And now our partners have the opportunity to maximize their earnings because they no longer have to share it with an upline, which we believe will lead to increased motivation and sales productivity. This change not only unlocks the selling opportunity for our partners, but also opens up all our sales channels to be far more cooperative with each other and competitive in the marketplace, which means we can help more people get healthy and active, which has been the thing that has set us apart for 26 years. These changes have allowed us to expand our presence on Amazon with new products and aligned pricing. We're launching on walmart.com in the fourth quarter, and we're also planning to expand our affiliate program to TikTok shops by Q2 2025. It really is liberating for the company because it gives our stellar products a chance to reach more people through a much wider variety of channels without competing with ourselves. But instead, with the kind of promotional synergy that drove our growth for two decades. After announcing the change to the affiliate model, many of our partners actually expressed relief at no longer having to dodge the question, is this an MLM? And some of our most successful partners who had stopped promoting body because affiliate marketing is just simpler and more productive. Well, they're now excited to return and promote our products and programs. And I recently read that 90% of people won't even answer a call if they think it's related to an MLM. What an obstacle to helping people like we're already doing something difficult, trying to help people exercise and improve their nutrition. So it just didn't make sense anymore to also try to overcome the MLM stigma, despite the incredible work and determination of our partners. So we've collaborated with top affiliate marketers to create a program that's compelling for our partners, while also financially viable and immediately scalable for the company. This program leverages our experience, rewarding our customers for sharing their success on social media without the MLM burden. I'll provide a full update on the affiliate transition at our next earnings call after Q4. However, while still early, I can already say that we're very pleased with the number and quality of partners who signed up to be affiliates since the November 1st launch. And this should bode well for the highly anticipated launch of our new program coming in December called BelvaTal, which we believe will be a significant addition to the portfolio. BelvaTal is our comprehensive women's hormone health program that was developed by Autumn Calabrese. She's the fitness and nutrition expert who also created the successful four week protocol for us in 2022. This new program addresses issues associated with women's hormone imbalances, including persistent weight loss struggles and symptoms like low energy, night sweats and hot flashes. BelvaTal offers a specific step by step nutrition plan, an incredibly innovative fitness program using the inexpensive door track device to replicate the experience of studio Pilates equipment, and two new proprietary supplements for metabolism, blood sugar, hormone and stress support. BelvaTal will also include access to the award winning Breathwork app. This program is a big deal and over two decades of running this company, I have never seen 12 week results like we've seen from the testing of BelvaTal. And our partners are excited to sell the program as affiliates since they'll no longer share commissions with the multi-level upline. Our plan to further expand our nutrition business is also enhanced by this change to the affiliate model. The affiliate model and performance marketing work together to increase visibility and demand for products like Shakeology and the Body Performance Line, which have never been marketed outside the network model before. So as we roll out advertising for our supplements, affiliates will now promote the same special offers to their audience on social media, creating a rising tide that lifts all ships. The launch of two new supplements with the BelvaTal program is particularly exciting as test participants actually asked to buy the supplements they use in the test so they could continue taking them. This is unprecedented demand coming out of a test group and further positions us for profitable top line growth, given the far larger TAM about 12 times for nutrition supplements compared to digital fitness. Finally, our partnerships activity is gaining momentum. We're launching a special offer in conjunction with the American Diabetes Association going into the new year, including a fitness program, an effective, easy to follow eating plans. And we're ramping up promotion of our collaboration with Dr. B and TruMed to offer HSA and FSA reimbursement for our programs and supplements, allowing customers to save 40% by paying with pre-tax dollars. All this is to say, we're actively executing on the second phase of our turnaround. Our products are second to none. And we're very excited about the renewed opportunity to create velocity as we go into the new product launches at the end of this quarter, plus aggressive promotional strategies for the first quarter of 2025.

Okay,

now let me turn the call over to our interim CFO, Brad Ramberg, for the details on Q3.

Thanks, Carl, and thank you everyone for joining the call today. I will review our Q3 results and provide our outlook for the fourth quarter. Just to reiterate, the company achieved revenue of 102 million, which was the midpoint of our guidance range of 97 million to 107 million. And we substantially beat our adjusted EBITDA guidance of 2 million to 6 million, coming in at 10.1 million for Q3 2024. This quarter marks our fourth consecutive quarter of positive adjusted EBITDA. Now let me get into the specifics of Q3. Revenues for the third quarter were 102 million in line with the midpoint of our guidance range. Sequentially, revenues declined 7%, and year over year revenues declined 20%. Q3 growth margins were .3% and declined 200 basis points over the prior quarter, but increased 880 basis points compared to the prior year. We're pleased to report that consolidated growth margins are within our long-term target of 65 to 70%. Moving to digital and nutrition revenue and growth margins. Digital revenue decreased by .6% from the prior quarter to 53.7 million and decreased by .5% year over year. Revenues were impacted due to pressure in our digital subscriber count, which decreased .8% sequentially to 1.1 million and declined .7% compared to the same period a year ago. Nutrition revenue decreased .4% for the prior quarter to 47.4 million and decreased .6% year over year. Nutrition subscriptions declined .2% sequentially to 130,000 and fell .3% year over year. Now, as Karl and Mark mentioned earlier, we're very excited about our move away from the MLM distribution model to a single level affiliate model, which will broaden our points of distribution and unlock our sales potential. Digital gross margin was .5% for the quarter in line with the prior quarter and representing a 600 basis point improvement from the prior year. The continued strength in year over year gross margin was due to lower depreciation expenses and driven by the end of useful life, certain fixed assets and lower contact capbacks and related amortizations as we continue to lower our production spend. Nutrition gross margin was 58.6%, representing a 220 basis point decline from the prior quarter and a 390 basis point improvement year over year. The decline from the prior quarter gross margin was primarily due to seasonal MLM related events. The gross margin strength from prior year was primarily driven by lower depreciation expense and the slight decrease in freight expenses. Moving on to operating expenses. Operating expenses for the quarter, which included 5.1 million in restructuring charges related to the pivot, declined .7% sequentially and .4% year over year to 81.8 million. Selling and marketing expense as a percent of revenue declined 650 basis points over the prior quarter and 930 basis points year over year to 44.6%. This significant improvement over the prior year was driven by a decrease in media spend and changes to our partner compensation plan. The improvement over the prior quarter was driven by a decrease in media spend and fewer MLM related events. Enterprise technology and development expense increased 340 basis points from the prior quarter and increased 430 basis points year over year to 19% of revenue. The increase was primarily due to approximately 2.9 million in accelerated depreciation expense recorded in the current quarter related to pivot impacted assets. G&A was .5% of revenue, increasing 30 basis points sequentially, essentially in line with prior year. We continue to drive expenses to the run rate of our business.

Net

loss was 12 million compared to a net loss of 10.9 million from the prior quarter. Our net loss in Q3 included 9.2 million of pivot related restructuring expenses. Without these restructuring expenses, our net loss would have been 2.8 million for the quarter. Net loss improved from the 32.7 million net loss from the prior year. Adjusted EBITDA was 10.1 million compared to 4.9 million in the prior quarter and a 5.8 million loss in the third quarter of last year. This is our fourth consecutive quarter, a positive adjusted EBITDA. Next, moving on to the balance sheet and cash flows. Our cash balance of 32.3 million was unchanged compared to 32.3 million in the prior quarter, and our net cash position was 10.6 million at the end of the quarter. Our cash generated in operations for the nine months ended was 9.3 million versus cash used in operations of 14.6 million for the nine months ended last year, a $24 million positive swing in cash generated from operations. Year to date, we generated 5.3 million in positive free cash flow compared to a negative 20 million over the same period last year. We are pleased that we are generating positive free cash flow as we execute through the first phase of our turnaround. The outstanding principal balance of our debt was 25.3 million as of September 30th. In October, we worked with our lender, Blue Torch Capital, to align our covenants with a new business model that we have just embarked on. This resulted in the removal of minimum revenue requirements. We implemented a reduced minimum liquidity covenant, and we've added a minimum consolidated adjusted EBITDA covenant. Lastly, turning to our outlook for the fourth quarter, we expect fourth quarter revenues to be in the range of 77 to 87 million. We expect a net loss in the range of 21 to 17 million, which includes an estimated 9 million of pivot-related charges. And we expect adjusted EBITDA in the range of 2 million to 6 million. Now let me turn the call back over to Mark for closing comments before we start our Q&A.

In closing, I want to emphasize the transformative journey Body has undertaken. By pivoting from an MLM network to a single-level affiliate network, we have massively unburdened our infrastructure. This strategic shift not only positions us to significantly increase our profitability, but also enhances our agility and allows us to respond swiftly to market demand. We've successfully removed the stigma associated with the MLM, and this has enabled us to maximize individual channels without constraints of our MLM. With these strategic changes, we're now poised to run a pure, -to-consumer business. This new model unlocks the top-line potential for Body, providing us with a clear path to sustainable growth. Okay, Operator, we can now open it up for questions, please.

If you would like to ask a question, it is star followed by 1 or your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, it is star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We'll pause briefly here as questions are registered. Our first question comes from Susan Anderson with the company Conocor. Good morning, Susan. Your line is now open.

Hi, good evening. Thanks for taking my questions. I was wondering if maybe you could expand on the revenue guidance for fourth quarter. It looks like it's a little bit of a step down from third quarter. So I'm curious, is this going to be consistent across the digital and nutrition businesses or is it one over the other? And then I guess, how should we just think about that step down?

Thanks. Hi, Susan. Thanks for calling today. This is Brad. So Q4 is traditionally a soft... Hello? Can you hear me? Yes.

I can hear you.

Okay. Thanks. Oh, perfect. Hi, Susan. Now Q4 is traditionally a softer quarter for the company, so we do have some seasonality. In addition, this is a bit of a transitional quarter for us. This is the first quarter that we're going into the affiliate model. So, as Carl mentioned, we're very happy with the number of affiliates that are starting to sign up with the company. And there's some training that takes time for them to get used to the new software. So that is well underway. So I would view really Q4 as really a transition away from the network into the affiliate model. And I would expect the mix between digital and nutrition to remain steady as it's been the last couple quarters. I wouldn't expect much of a shift in this quarter. And as the affiliates gain traction, we'll report on that when we report next quarter earnings.

Okay, great. That's helpful. That makes sense. And then I know you're not giving too many details yet on the new business model, but maybe if you could just kind of talk about the logistics on how that transition to the affiliate program is going to work. So it sounds like you mentioned that there's already been some formal partners sign up. So I guess new existing partners basically go on the platform, re-sign up, and then start selling. And then also I'm curious just how you're marketing this new program to maybe some other potential people out there that may want to be part of it.

Thanks. Hi, Susan. It's Carl. Great question. So yeah, we're very pleased with the transition of former network partners over to affiliate and the enthusiasm that they've got for the more agile business model. There's really we're approaching this from three levels. Obviously, we want to maximize the opportunity for our former network partners. So we've given them the incentive to come over and sign up in November in order to be participating in the highest bonus tier, which as Mark mentioned, unlocks the potential for commissions between 35 and 50%. So and we will continue then to then open it up to our very broad database to allow for both our current subscribers and last subscribers to come in and participate in this almost like a refer a friend type of program because it's the barrier of entry is so low. There's no cost to get started. And it's very easy just to put a link up and say, hey, why don't you join it? Join me and do this program with me. So it's an opportunity for everybody to monetize their health and fitness. Finally, we, we launched this affiliate program on probably the largest affiliate platform in the world, Impact.com. With the intent that we might be able to penetrate into their over 300,000 existing affiliates on their platform with one of the most aggressive commission structures in the industry. So we are hoping and initiating in the end of November going into December to see how many of those existing affiliates on the Impact.com platform we might be able to bring in.

Susan, this is Mark. Hey, just to follow on to close the loop. Carl just said in what what Brad shared with you. So this fourth quarter is really sort of a transition trough quarter for us because we announced in October that we were going to be moving out of the network. So you had a little bit of the bandaid pull off and that. And then we didn't start taking affiliates as signups until November 1st. So that's continuing. We're barely two weeks into that. And they have to get used to selling on a new structure with a new system. So really December will be the first sort of pure affiliate month because October is still a little bit of a hybrid. November is a little bit of a hybrid, a little bit of network, a little bit of affiliate. December will be all affiliates. So we had a, we had a bridge somewhere and we decided Q4 since it's a seasonally lower quarter anyway was the time to execute the bridge to the other side because you definitely would not want to do that in Q1, which is your seasonally lower quarter anyway. So that's the seasonally strongest period.

Yeah, OK, that that definitely makes sense. And then maybe if you could just expand on the Bell Vitell program, it looks, is this still in test phase or I guess when you guys expect it to be up and running? And I guess in terms of just like fitting into your existing programs, is it mainly going to be nutritional products that come out of that as well as key advice for for women or how should we think about that?

Yeah, this is a super exciting program. It's done. It's testing. We finished that testing late this summer with incredible results. Everybody in it had improvement in their overall symptoms from hormone imbalances and significant weight loss upwards of I think our highest was a little over 26 pounds in 12 weeks. It is a comprehensive program, including this innovative fitness program, which mimics the kind of Pilates moves that you would do on an expensive reformer or Cadillac machine with inexpensive equipment you can use at home. It's an easy to follow step by step nutrition plan that has phases over the course of the 12 weeks. It has access to the Breathwork app. So to help people reduce stress with breathing exercises and two proprietary supplements that we're excited to add to the catalog. We will sell this as one bundle for $299 starting December 10th. And we already have thousands of reservations effectively based on letting people register for the for early bird access to it back in August. So we're very excited about this launch about what it does for the end of December and also going into the first quarter.

Okay, great. That sounds exciting. It was that 299. You mentioned was it a couple months or something like that.

It's it's $299 for the comprehensive three month program. The nutritionals are on what we call a continuity. So when they buy, they get the first month and then they automatically ship until they cancel. And that's an interesting footnote to it. I mentioned in my opening remarks that for the first time we had a test group that finished like a test group. They get it for free, right? This is the first time we've ever had participants in a test group actually offered to buy the supplements after that test was done, which was very encouraging in terms of what the ongoing demand for these supplements will be when people finish the 12 week program.

Okay, great. That sounds exciting. I'll go ahead and pass along. Thank you, Susan.

Next question comes from Chris with the company Singular Research. Chris, your line is that open?

Hi, yes, I'm in for Gaushi. Can you provide more details on the features and capabilities of the centralized e-commerce platform at body.com? How does it differ from your previous digital offerings?

Well, essentially, this is Mark. Essentially, in the previous structure with the MLM, we didn't really have a very robust body.com direct to consumer website because we were somewhat hamstrung by some of the equivalency issues that were posed by the MLM. So people were sent by those in the network who would sell them. They were sent to a site called team Beachbody.com. So we had sort of a bifurcated approach and our general consumer website body.com didn't even sell our nutritional products direct to the consumer. You actually had to come in through a referral from the former MLM network. That's all going away. Team Beachbody will be gone. Body.com will be the primary DTC website for the company. You'll be able to buy all of our products there. And when an affiliate provides you with the link, which gives them credit for the sale, they'll be sending you there to transact your purchases. So it's no more captive sales, no more captive MLM, no more bifurcated approach. Everything will be focused against the single powerful direct to consumer website called body.com. All of our products will be sold there, and that's where people will be directed to transact.

I'll also add Mark, because of the change in business model, we have the ability now to actively market our products within the body app itself, where we actually serve up the content. So now we can actually market right along the workouts with our various supplements that can help you get results with those workouts. And it takes you right to the body.com site. We couldn't do that before because of the conflict with the network marketing organization. So now it's really like I said, a rising tide floats all ships.

Great. As you continue to expand your digital offerings and promotional activities, are there plans to introduce any subscription models or geared access options to your digital content?

So, as you probably are aware, we are right now a digital subscription model. That's what we are in our digital fitness business. You can buy it for a number of months or a year, but you are you are a subscriber to the process. We also have individual programs that we will sell you so you could buy P90X for 59.95 and own it for the rest of your days. But the primary focus of our business has been and will continue to be on the fitness side subscription based.

Okay, great. What percentage of your current sales come from mobile devices and how do you expect this to change with the new e-commerce platform?

Well, it's an interesting question. We don't disclose the specifics, but in general within the e-com world, 70 plus percent of consumers utilize a mobile platform and about 25 to 30 percent in general use a computer platform. So desktop or a laptop, etc. So as we go forward, I think you'll see more and more people using mobile devices for sure. And we're also going to see more and more people using an app based structure versus just using pure website access.

Okay, great. Thanks for the answers. Sure. Thank

you.

At this time, there are no more questions registered in queue. If you'd like to ask a question, it is star followed by one. No more questions registered in queue. I'd like to pass the conference back over to our hosting team for closing remarks.

Thank you very much, operator. I want to thank everybody for attending the call today. We're really excited about this business model transition at body, and we look forward to talking to you on the next earnings call to be able to provide you with some color on how the new affiliate marketing program is going. So thanks everyone. Bye.

That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.