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

Greetings, everyone. I'm Thierry Wuilloud. I'm a senior analyst at Water Tower Research focusing on emerging growth companies. We have with us this morning, Paul Tarell; CFO of Gaia. Paul, thank you for joining us today.

Thanks for having me.

Just before we start, as a quick reminder, we will record the session, and then we will post it to our website. We'll also prepare a transcript that will also be available on our website at watertowerresearch.com.

Paul, during the first quarter call, you discussed some positive trends with the membership development, both in the U.S. and non-English speakers. Are you continuing to see those positive -- those green shoots? Are you seeing those good trends continuing?

Yes, I would say, as we've gone from late winter, early spring into summer, we've continued to see some positive trends stay. We've also seen the reintroduction of our historical cyclical trend around spring transitioning into summer where we start to see a little bit of softness in particularly as you approach Labor Day -- or excuse me, Memorial Day, you start to see a little bit of softness in new user sign-ups. But we're still trending in the right direction overall, still seeing those positive developments in French and German in particular, which we started marketing in earnest probably about 9 or 10 months ago and have been slowly ramping it up as it's continued to get traction. And our third-party relationships continue to kind of stay in trend. I won't say that anything is growing gangbusters right now, but we don't expect it to, but we also haven't reversed trend and falling back to the pattern we were in for the majority of last year.

So now that most of the COVID cycle has gone through, has subsided, I would think. What can you tell us about the demographics for the English-speaking members in terms of maybe expected attrition, lifetime values and other key characteristics?

Sure. I'd say at this point, we've pretty much observed that, that population has started to behave like other prior populations once they get to the 2-plus year remember mark. So from my perspective, we're not really tracking it as a COVID cohort anymore. It's really now they've just fallen into their tenure bands and they're behaving similar to how the prior members that got into those tenure bands have behaved in terms of engagement and consumption and retention and therefore, lifetime value is in line as well. Obviously, the volume is a little bit different than some of our historical cohorts at that size, but that's helping the overall stability of the member base because the retention of the 2-plus year members is really high on a month-to-month basis. And on the annual plan, it has a similar benefit. The first 2 years is really where we lose the majority of people. So once they make it to that 2-year mark, they tend to stick around for a while, and we're seeing that trend flow through into the COVID cohorts as they've all started to age up to that group.

Okay. So if you look at the cohort in the U.S., what's the percentage of your direct members that are beyond those 2 years at this point?

I don't have 2 years off the top of my head, but I would say we're over 50% of our member base, probably closer to 60-ish percent of our member base on the direct side is over 1 year old. I don't have the exact number off the top of my head for the 2-year plus cohort.

And you did discuss the French and the German-speaking markets. Are those -- did you change something in the marketing? You mentioned some more marketing efforts. So is that a new effort that you started a few months ago? Or is it just a better environment and more success there?

I'd say it's really a strategic launch of marketing efforts in those languages that is starting to get to critical mass. When you start with marketing, you obviously want to start with organic and nonpaid sources to seed the market. And then what we've learned is now doing this for 10 years on the U.S. English side is that you really have to be mindful about ramping up spend on paid media. So that you're doing it in a real disciplined way so that you're not going to disrupt anything because what we've seen in the U.S., particularly when we were going very aggressively in '17 and '18, if we try to ramp up spend too quickly, we actually compete against ourselves with the way that a lot of the algorithms work. So I'd say it's less of new initiatives and more of just the plan that we kicked off last summer to start marketing and investing in marketing for those languages is now starting to reach, I won't say maturity, but we're somewhere near adolescents in terms of what we're doing there. And as it grows, we're able to continue to ramp up our spending there and are still seeing favorable CPA dynamics. So then the other side of the equation is what's the engagement and retention look like as you ramp up spend because intrinsically paid media sign-ups behave differently than the first 5,000 or 10,000 people that found you via word of mouth. So you got to have to pay attention to those things.

Okay. And the content there is mostly dubbed content or...

No. Actually, we started with subtitling and dubbing of our more popular shows. But now we also do some native language programming, particularly in the yoga and meditation spaces because that's an easy place for us to produce native language content. It also allows us to tap into local market in terms of marketing and reach perspective. So we do that. But then we also do have some of our bigger shows that we've done in French and German with voiceover. So...

So the -- for example, the German-speaking production is done in your campus in Colorado.

No. For the practice-based stuff, we actually use local resources over there and just do work for hire again. We want to use the local talent because that's how what we've seen success with in the U.S. market and even Spain when we went there. So we use local talent and contract production via production over there. So yes, so we're not -- we can manage it remotely, but we don't have boots on the ground over there doing filming at this point.

Yes. Yes. Okay. Great. Any update on the Gaia marketplace in terms of why you ready to launch? Or where are you at?

Yes. So technical launch is ready to go. The stores all built out. If you went to the gaia.com and clicked on merchandise, you would see that there's a storefront up there with some swag, I'll call it, right? So Gaia branded merchandise and a couple of our legacy courses that we acquired with our Yoga International acquisition, just to test the plumbing and the kind of the look and feel of everything and make sure it's all working. So that's all ready to go. And now we're at the point of really trying to identify, engage and get launched with a handful of key vendor partners because we're not trying to have 1 million in one thing. We're trying to have a curated selection of high-value relatively unique items that it's worthwhile for people to come to Gaia to purchase them. So one of the things that we're going to be launching with is actually more of an experience-based offering where it ties in very nicely to our ancient civilization, which is one of our flagship shows, and we also have the GaiaSphere event that we did last year with the Ancient Civilization Conference and another one coming this year. So now you're able to actually go on a relatively intimate behind the scenes tour of Egypt with a Egyptologist that gets you access to places that you wouldn't otherwise be able to get access to and you're doing it in the Gaia community. So we think there's going to be pretty good uptake on that just given what the sweet spot fit. And the reason it's important is because you're talking about $3,000-plus ticket item where the economics make a lot more sense than trying to ship a bunch of widgets. We're really trying to stay away from the widgets and more at the experiences and high-margin items that would be harder to market just generally because that's one of the premises of the Gaia value exchanges is that we're giving you a marketplace that has the right-minded consumers to come in. So your fill rate is going to be a lot higher and your cost of acquisition is going to, therefore, be a lot lower. So that's really what we're looking at with this first summer launch of products. And then as it grows, obviously, we can hire people to run it and then we may get into other things down the line. But at the beginning because there's not a lot of pressure for us to drive revenues or return on investment because we didn't invest that much into getting at launch. We're really looking at how do we get traction within the member base for people to see value there?

So I think it's obvious on your comment, but for example, the visiting or the Egyptian experience, that's actually a trip to Egypt. It's guided by one of your on-air talent, I would assume.

It's not. The person that's leading the trip, he's not on-air talent. He definitely is connected to that group, but I wouldn't say it's someone that's on the camera. But he does this in partnership with some of our talent where they then market to their people and then they go on the trip with them. He has done that. So he's very familiar in leading these types of excursions. And again, he can get access to places that most people wouldn't be able to get access to.

Yes. So when you launch the marketplace or how many of those types of offerings you think you will have in the beginning?

Again, I think in the beginning, it's about what makes sense for us with what we're trying to do, which is launch this incrementally without having to incur a bunch of overhead and G&A expenses to get it going. So I would say this summer, it's going to be sub-10% probably of things that are ready when we launch, but there are going to be things that people find value in. And then that will allow us to bring in who are actively hiring right now, recruiting and hiring for someone to lead the marketplace overall. And so then that timing will then allow them to start to go out and build the relationships with the vendors, figure out the logistics of everything. Because again, we don't want to layer a bunch of expenses in without revenues. We want this to really be about revenue and cash flow expansion first and then scaling it up second.

Okay. And again, all the preparation and all the software and the work you've done to get the marketplace ready, that's all being expensed and it's not really incremental to your P&L at this point in time.

Correct. And just to put it into a proper order of magnitude sizing, we're talking about double-digit thousands investment that we've made here in terms of internal resource allocation and then also some external expertise to get the plumbing set up the way that we want it. So that someone could come from Gaia and go to the store and it would allow them to get their Gaia discount and then still allow people from outside the Gaia ecosystem to come to the store and buy and pay the full price. That was a really important component for us that we needed to get solved, and we -- that got solved. But again, we're still in the 50,000 to 80,000 investment threshold inclusive of internal resources.

Okay. So maybe a nonmember that goes to gaia.com and sees something like that, that is interesting. That's obviously maybe the question I want to join Gaia, become a member to get the discount.

100%, and that's actually part of the bigger strategic focus of this is how do we create additional marketing paths for people to find Gaia and we know that if they don't find us because of the content and they find us because of the store, the likelihood for them to have an affinity to the content is relatively high and the financial incentive for them to sign up for a membership is obviously there as well. Because again, I think we talked on one of our prior chats about the Costco model, and you buy your Costco card membership so that you can go get your goods. But then if you need services, carpet or roof or something, you also know that you can go to costco.com and get a discount with a trusted vendor partner for that stuff as well. So that's really the premise behind the model that we're trying to build on the Gaia side. And again, obviously, focusing on high-margin items that aren't easily replicatable so that we're not going to get to a race to the bottom and be competing with some of the other bigger online e-commerce sites.

Great. I think you had mentioned July for the launch, but do you have a [ D-day ] or not quite yet?

Well, as I said, if you went to the site, it's already there. So it's about when do we get the logistics all squared away for the 2 vendors that we're working with. But I would say July is well within striking distance of what we're looking at. And then it will just -- there won't be a lot of fanfare, we'll just be incrementally adding things it. And then as Jirka mentioned on the last quarterly call, really, the focus is going to be on the Gaia side is going to be informing and educating members that this service is available for them and the benefits that are there. And again, with what we're picking for the initial items, we're going to have a lot more demand than supply, which is going to allow us to then add particularly for the tour-based things, you can add those incrementally and then it's just a matter of how does the calendar fit together, right? And then as it scales, you can obviously get some economies of scale in the logistics of the bookings and everything. But we don't intend to get knee deep in the logistics side of it. We're really facilitating the exchange for the trip and then the trip facilitator is the one that's dealing with the actual trip logistics. So we're not getting into the travel business. I want to make sure that's clear.

Yes, yes. Okay. Great. Maybe just in conclusion, you had this SEC investigation. I think you had indicated a proposed settlement and the I -- we saw on the SEC website that it seems that this has been resolved. Can you just give us some context there or some explanation.

Sure. So just a quick contextual back story. So last September, we after 2-plus years of going through the voluntary request for information and then the escalations of that, we decided to engage with the staff about proffering a settlement because we've been spending a pretty significant amount of expenses and cash on legal fees to go through the matter. So last September, we proposed that settlement framework to the SEC staff here in Denver. At that point as when we accrued and disclosed it under the accounting guidance. So we did our $2 million accrual back in September of last year, and it's really taken from now -- from then until now for it to work through the SEC process. And so a couple of weeks ago, I think the commissioners voted on it, approved it and then it became public. So at this point, it's behind us. The public order is out there. I would encourage anyone that's interested to go read the full order, not just the snippet of the release because you'll see what the full matter is about and the terms of the settlement. But effectively, at this point, we have paid $600,000 and we have $1.4 million left to pay, but it's been all accrued. And the more important thing is that the legal bills have gone from $500,000 to $100,000 a month to effectively 0 on this, which is why we entered into the settlement in the first place.

Great. Well, I think that's might have been a little bit of an overhang for a few people, and it's -- and maybe also internally. So I think it's good that's resolved. Hey, this was really helpful. I appreciate the update. And it will be interesting to see how the Gaia marketplace builds up as time goes and maybe I see you on one of those Egyptian trips. That sounds [indiscernible]

It does. Actually, we've had -- I know a couple of our staff have gone on other trips facilitated by this person, and they've come back and said it was kind of a life-changing experience for them. So maybe you will see many there.

I'm very entering, yes. Okay. Great. Paul, thank you very much. Take care. Bye.

All right. Thank you. Bye.