Gaia, Inc. (GAIA) Earnings Call Transcript & Summary

Greetings, everyone. I'm Thierry Wuilloud. I'm an analyst at Water Tower Research covering emerging growth company. I have with me this morning, Paul Tarell, CFO of Gaia. Paul, good morning.

Good morning.

Just for our investors and our listeners, thank you for joining us. We will have a recording of the fire side chat. We'll also have a transcript/management series in a couple of days after the chat that you can access on our website or also on Gaia's website.

So Paul, let's first discuss the Gaia marketplace that you and Jirka mentioned on the quarterly earnings call. I believe you said it would consist mostly your nontangible goods, I believe that means services. Can you maybe give us a bit more color on what those services would be -- providers would be so on and so forth?

Sure. I'll set a little bit of context for this -- for those that didn't listen to the call, and provide some of what we provided in the remarks on the call. So when we think about Gaia marketplace, we're really looking at creating a 2-sided marketplace with our members on one side and merchants on the other side. And the reason that we're going down this route is, we started to explore AVOD or ad-supported video, which is what the majority of the other entertainment-based streaming providers are going to help subsidize customer acquisition and their content investment. We really evaluated where those marketing dollars would -- or advertising dollars would come from. And a good portion of advertising dollars spent on the Internet today comes from industries that we want to support on our platform -- so big pharma, financial services and the like. So as you start to winnow down the pool of available ad dollars, it didn't really start to pencil out from an ROI perspective to do the infrastructure that would be necessary to support an ad layer given the limited dollars that are there. So what we looked at instead was, is there a way to effectively bring value to our members that also helps create an incremental revenue stream. And that's where we ended with this marketplace idea. And working very similar to way Costco might work, where you pay your monthly membership -- or excuse me, your annual membership fee, and in exchange for that, you get access to pricing and goods and services via costco.com through other vendors at a discount with the Costco standing behind it as well. So that's where the idea came from. And as we started to look at that, we said, okay, that's very interesting idea. But for those that are -- have been paying attention for a while, we sold our physical goods distribution business back in 2016 to get into nontangible subscription offerings. And so we don't want to go backwards into having to deal with inventory and AR and receivables and all those things. So what's the way that we can get into this? We started to look at it from the perspective of what have we learned from Yoga International when we bought them and where did they generate a good chunk of their cash flows prior to us buying them. And they actually had a la carte courses that they were selling for premium dollars for those people that wanted those courses. And so that's where the combination of all of these ideas coalesce in the saying, okay, let's do this. And so we looked at what it would take to make the investment to bring it up. We're going to stand up a pretty -- it will look great from the perspective of the web experience, but we're not taking any inventory risks, and we're really looking at nontangible goods to start with courses, meditation trainings or treats, those types of offerings where we can advertise it on our service to our members and they will get a discount if they decided to buy it, and the vendor partners will get access to our audience without having to spend traditional "marketing dollars" they'll just pay for it as part of a rev share with Gaia.

Interesting. So how will you introduce that to your members? Is it going to be an ad? Is it going to be an e-mail campaign? How will you launch it and promote it?

Yes, I think we have to be mindful about not overpromoting it for people that are interested in it because then we're just change in advertising from one thing to another. So it's about making it available on the site via a top-level navigation and then e-mail communications around it and potentially some -- we have a spot that we do every week called "This Week on Gaia" where we highlight upcoming shows that are either out or coming out, and so we can weave it into there. I wouldn't expect that we're going to do a lot of on-site promotion to subscription members. We will do it more through secondary messaging on e-mail to make people aware of it and then let it build from there. And again, we've really derisked our thinking on this. We're not trying to make a quick pivot into needing to generate massive amounts of revenue from this business. We look at it as an offering that will be beneficial to our members and also beneficial to other vendors that are in the space that are competing in a very crowded, expensive and getting more inefficient everyday digital advertising market. So we look at it as a triple win. One for Gaia and that we can expand our revenue and margin profile via this revenue stream. One also for our members because they get access to things that they might be interested in at a discount and then obviously for the vendor partners because they're tapping into a very prime audience that they wouldn't necessarily be able to advertise against otherwise.

You indicated on the quarterly call that you conducted a survey and that half of your members expressed interest. Do you have a little bit of color around that? Is it a high degree of confidence in that -- maybe half of the members interested? Or what are your thoughts there?

I think that was really a signal to say, are we going to move forward here? And then based on that signal, we decided to move forward in a very pragmatic way, which is minimum investment upfront, using partners or relationships that we've already either have from teacher relationships, ambassador relationships or just from our internet work of people being able to create warm introductions to service providers that are out in the space and then really not making a big investment in it. So what are my expectations? My expectations are that this will be valuable over time. The worst thing we could do is put a high level of expectations on a short time horizon on it and then have to overinvest in getting it launched and out the door. That's not what we're trying to do.

And I assume modest investment in terms of launching that you probably have already incurred some of those costs and whatever incremental cost they might be, that's already in the numbers you've talked for 2023, correct?

Yes, for 2023. In terms of the cost, we looked at it from a -- we already had kind of a merchandise store where you could buy Gaia-branded products if you are a member. And through that vendor partner, we've looked at extending the store and the capabilities and we are. And so we're really talking about a little bit of monthly licensing to tap into that vendor partner in terms of upfront investment. And then low, not even 6 figures, right? We're talking about mid-double-digit thousands in terms of internal investment from engineering resources perspective to get this stood up and then it will fund itself from there as it gets traction. We intend to reinvest the traction back into allowing it to scale and grow. But if you look at it from the real investment perspective, you're talking somewhere in the $50,000 to $100,000 range inclusive of internal resources that would be doing something else.

Yes. Okay. Great. If we switch to the -- to your core business, to the video streaming business, you've indicated some positive development in the French and German language markets is -- is the ramp there something maybe similar to what you experienced in the U.S. or in the English market in 2017, '18, '19? Or -- and can -- like the low-hanging fruits or the most interested members are really gravitating to your offering. Or can you give us any color there?

Sure. I think it's more akin to where we were in 2015 and 2016 before we really started ramping up paid media efforts on the English side, the domestic English side. So we are getting high affinity members that are being attracted to the Gaia platform. And so we're seeing conversion rates and early retention signals that indicate that it's a healthy cohort of members. And we're learning from what we learned as we were trying to scale the English offering with marketing dollars or advertising dollars. And we understand that there's an upper limit to how fast you can deploy those dollars without negatively affecting performance. So we're really looking at it as an incremental marginal growth play for us as it relates to the overall business and investing in it pragmatically. So it's not like where we were in '17 and '18, where we have a well-funded balance sheet and a subscale English offering that we need to get to scale as quickly as possible. This is more about adding on incremental regions and markets in a pragmatic way and ensuring that we're getting the right level of ROI on a per member basis right out of the gate. So not over investing to get to scale, but really ensuring that per member customer acquisition and lifetime value numbers make sense based on where we are today.

Okay. You had a high affinity comments you make. I think that make sense situated in early stage of the ramp. In terms of the marketing, the issues or the changes that Apple introduced, maybe it's 18 months ago now, is that affecting you over there in the same way as here? Or are the rules different? Or what can you say about that?

It's -- I don't have a solid answer because I don't know before and after, because we weren't really doing the marketing there when those changes were rolling out. So we've adapted to the reality of where it is. And we're seeing good, as I said, good CPA, good conversion rates and healthy engagement. And so we're just running from there. I don't have any way to correlate pre and post. I will say that privacy has already always been higher on the EU side of things than it has been on the U.S. side of things. So -- but we're operating in the environment that we're in not looking at where we were before. So yes, it may be affecting us, but we're still making it work. I think it disproportionately affected us in the U.S. because the changes were so massive and the entire digital advertising ecosystem was predicated on data that's no longer available and everyone's having to scramble, service providers, marketing spenders and consumers to a certain extent.

In the U.S., if we switch the conversation to that market, you had a headwind most of last year. I think maybe the COVID bulge, if you will, people who tried your service during COVID and then went on to other things. Are you at the end of that progene, if you will, of those members? Or how do you see the situation?

Yes, I don't want to define an end to the situation. The bulk of the people that joined us during the height of COVID that were diminishing levels of engagement have started to cycle off of the program and the ones that are left are engaged and staying. It's still a big cohort of people, right? So there's always going to be a little bit of a factor of that as they come up, particularly for annual renewals just because of the size of them. But as we look at the significant headwind that we experienced in late '21 and pretty much all of '22, I would say that it's dissipated at this point, and we're starting to see the direct member base get some traction, albeit at a more methodical rate than what it was during the go-go days of COVID. But we're starting to see some net growth as we said on the call. And we're -- the overall member base is still being negatively impacted by our third-party subscription partners, of which Amazon and Comcast are our 2 largest ones. And we believe that's somewhat structural tied to their underlying business because they have -- on the Comcast side, they obviously have a big headwind against cable cutting, right, as people are moving more and more to subscription stand-alone offerings because the cable bill is so expensive. And on the Amazon Prime side, you have to pay for Amazon Prime in order to get access to Amazon Prime video. So there's like a double paywall in front of it. And I think people, particularly with the uncertainty that's coming in and the inflationary pressures on the majority in goods and services, I think a lot of what we see when we look at the data across all the Amazon Prime video premium subscription offerings, they're all seeing some net contraction, which tells us that it's likely tied to something systemic at the Amazon Prime level -- but that's part of the reason why we limit our exposure to those third-party partners because we don't want to get too dependent on them.

Yes. But I mean that's -- you mentioned something interesting. You can -- so you can track the engagement of your members and then there must be a really strong predictor of whether they renew or whether they stay on and so on and so forth.

Correct. On the direct numbers, and again, this is part of the reason why third-party members are -- have been limited because we don't have any intelligence on individual members. We know in aggregate, what's being viewed by platform, but I don't understand at the individual consumer level. So we -- you kind of take what you get. Where on the direct side, we understand what people are engaging with and then we can use that to tune our e-mail communications to them. We can use it to tune on-site promotion to them. We can start to glean what's healthy customer acquisition and what's unhealthy customer acquisition based on 1-month and 3-month and 6-month retention from a variety of signals that we get. So yes, we can understand at the individual customer level. But then as you aggregate that up in the cohorts, we can also start to get some intelligence. And that's part of the reason why we've been able to -- even with the issues of our advertising data, getting more limited, we're able to increase the efficacy of it because we're starting to adapt to the reality that -- we may not know stuff about an individual consumer, but we understand stuff about the overall advertising campaign and the health of the customers that came in. And so we can start to use the math to get back to, okay, what's a healthy amount of money to spend on a given campaign and platform. And then how do we reallocate and optimize those dollars.

Okay. Well, that's very interesting. I didn't realize you have less information. I mean, it makes sense when you explain things, but that you have less information on the members that are not the direct members. So you have aggregate information for those, but you don't have the same granularity that you have for your direct members.

Correct. And that's the trade-off, right? You get access to a bigger audience, but you know less about them.

So you indicated also on the call that you're expecting positive cash flows this year, I think, to the tune of $7 million to $9 million, both as a result of streamlining on the cost side and maybe the better trends you're seeing on the headcount side. Is there a meaningful contribution from Gaia marketplace in there? Or is it -- how would you qualify that on this...

I would say, generally, there's not a meaningful contribution from Gaia marketplace unless it gets traction because we've -- as I said, we're relatively derisking it to get it ramped up because with the uncertain economic environment, the last thing we want to do is overinvest in it and then have these be kind of premium marginal utility items that might face some demand pressure if things continue to erode as it relates to the U.S. and global economies and consumer sentiment. But the way that we get to those numbers is pretty foundational to how we've run this business overall. So we know what our EBITDA margins are, and we were pressured in 2022 as we -- and 2021 as we were contracting our member base. The EBITDA margins were there, but the cash flows from operations weren't because as the subscription base declined, deferred revenue also unwound. And so we didn't get the benefit of the negative working capital that you would get when you grow. Now as we've made it through 2022, and we see that we've kind of stabilized at our new member base, and we're starting to see some incremental albeit modest growth in our direct member base, the negative working capital cycle is going to kick back in. And so where that was a headwind for us in 2022 as it relates to cash flow from operations, it will be a benefit -- neutral to benefit for us as you look at 2023. So if you think similar EBITDA dollars to where we were this year, rather than a drag through working capital on the cash flow statement, we'll start to get neutral or benefit from that. And then the majority of the savings that we implemented is on development and capitalized items for the most part as it relates to the investing side of the cash flow statement, and that's where you're going to start to see the benefit of this $7 million to $9 million kicking in is even in a low growth scenario, we feel pretty confident about the low end range of that number. And if we start to get some traction in the second half of the year, which again, we're not banking on, but we're starting to see some green shoots. And if they continue to manifest, then we should start to be able to see the upper end of that range. And then it's just really a question of what do we reinvest it back into, content takes a little bit longer lead time, marketing is relatively quick, but the discipline that we've learned over '22 and early '23 is ensuring we're getting the right ROI on the spend, and that we're not just spending the money to drive near-term growth, but we're spending the money to increase long-term cash flows. That's really been the big shift in late '21 and '22 as we've adapted to the new realities of post-COVID.

Right. So the $7 million to $9 million in cash flows is -- does it translate also a little bit to EBITDA? Or you -- is it purely from working capital improvement or the cost reduction and the healthier, maybe top line will lead to a positive EBITDA. I mean, stepping back a little bit, you've had this model where you were kind of reinvesting in marketing and targeting a little bit of a breakeven point there. But are we -- maybe past that at this stage?

I think we are taking a one step at a time. And in the current market environment, cash is important and getting to solid sustainable free cash flows is critically important for us. And market cycles change, and there will be a lot less competition in a year from now as some of these weaker players that have aspirations to get to free cash flow that can't make it. So I won't say that we've turned the corner, but what we've done over our 30-plus year operating history as Gaia with Jirka's ownership and stewardship of it has been responsive to the market environments to ensure that we can maintain our own destiny, and that's really what we're at right now. So we focused on financial independence. We focus on technology independence. Now we're focusing on marketing and growth independence so that we give ourselves optionality going forward. And that's really what we're focused on. So I don't want to comment on what the long-term plan is because the long-term is, one of my investor mentors told me, is a series of short terms. And so we're just going to continue to adapt and react to the short terms, have a longer-term vision that we can execute on with some optionality and then be opportunistic because we're in a better position than most companies of our size and scale to navigate through uncertain waters for the next 9 to 12 months. And valuations will come back around and our business will continue to perform and that's what we're focused on.

Well, Paul, great. I think that was an interesting conversation. There's really some encouraging catalysts that we can look for. It will be interesting to see how Gaia marketplace does. I don't feel there's a huge amount of expectation built up in that effort, but it will be interesting to see that. And then as you said, it seems like there's some green shoots on the membership growth again, maybe with the French and German and more stability on the -- in the U.S. I think for me that kind of covers what I was hoping to cover today, that was very helpful. Any closing comments from you? Or are we good for the day?

I think we're good. I think that was a pretty meaty conversation for people to digest.

Yes. And so we'll provide a transcript and edited transcript, so people can go back and really absorb the information that was very -- yes, that was helpful. Thank you, Paul. Thank you to all listeners, to the live listeners, and the recorded listeners. And again, there will be a recording on our website, watertowerresearch.com. And in a couple of days or so, we'll have a transcript that will also be available to all on our website. Thank you very much. Have a great rest of the day. Goodbye now.

Bye.