Gaia Inc

NASDAQ:GAIA

Earnings Call Analysis

Overview of Q3 Performance

Gaia, during its third quarter of 2024, reported a revenue growth of 10%, bringing the total to $22.2 million, up from $20.2 million year-over-year. Gross profit rose by 11% to $19.1 million, improving gross margin from 85.2% to 86%. The company's member base also grew by 7%, reaching 846,000 subscribers. This quarter marked the sixth consecutive quarter of positive operating and free cash flow, which improved by approximately $1.5 million.

Price Adjustment Strategy Impact

For the first time in its history, Gaia raised subscription prices by at least $2. While the increase led to a temporary flatness in member count, the company anticipates an increase in revenue to nearly $24 million in Q4 due to this change. In Q4, early indicators show that the price adjustments for legacy members are yielding better-than-expected results, suggesting a positive trajectory for revenue growth.

Future Revenue and Gross Margin Expectations

Looking ahead, Gaia expects additional revenue contributions from its Gaia Marketplace initiative and anticipates gross margins to surpass 86%. The company aims to maintain an annual revenue growth rate, mainly driven by continuing increases in Average Revenue Per User (ARPU) stemming from the recent price hikes.

Member Retention and Growth Strategy

Gaia's management reported significant improvements in member retention over the past year, focusing on attracting annual subscriptions. As the strategic position of the company strengthens, they anticipate membership growth to exceed 850,000 by year-end. Efforts to migrate at least 60% of the member base to the new pricing are expected to complete by the end of 2024.

Live Events and Marketing Impact

During the quarter, Gaia hosted key events including the largest ancient civilization conference to date and sold out premium events. These events contribute to community building and are used as promotional opportunities, fostering conversions to higher-tier memberships. The successful completion of these events illustrates a strong market interest, indicating positive momentum as Gaia moves into Q4 and beyond.

Investment in Technology and Future Community Plans

Gaia plans to enhance its service offerings through a partnership with ElevenLabs for AI-powered dubbing and translation services, improving content accessibility for a global audience. Looking forward, Gaia intends to fully launch its community initiative in early 2026, positioning it as a robust contributor to revenue and member engagement.

Financial Health and Cash Flow Outlook

Gaia's sustained positive free cash flow reflects a solid operational foundation, with a cash balance of $4.4 million and access to a $10 million line of credit. Management indicates no immediate need for new capital, supported by the ongoing progression in revenue and cash generation.

Conclusion and Outlook

The company’s robust growth strategy, highlighted by successful price adjustments, increasing market outreach via its Marketplace, and enhanced member experiences through live events, positions Gaia well for upcoming quarters. With expected revenues nearing $24 million in Q4 and stable growth in ARPU, investors can look forward to continued favorable financial results.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. Welcome to Gaia's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] Joining us today from Gaia are Jirka Rysavy, Executive Chairman; James Colquhoun, 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 Factors 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, Jirka Rysavy. Thank you, and over to you.

[Jirka Rysavy, executive]

Good afternoon, everyone.

During the third quarter, which is seasonally slow, we grew our revenue at a similar rate as the first time -- first part of the year at 10%. Gross profit increased 11% with gross margin improving to 86% from 85.2% at the year ago quarter. Member count grew at the same period by 7%. The third quarter was our sixth consecutive quarter of positive operating and free cash flow, 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 increase -- 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.

[James Colquhoun, executive]

Hello, everyone, and thank you, Jirka.

As mentioned, for the first time in Gaia'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 U.K. 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 we'll 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 that sign up, 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 2 Gaia Sphere events, including our largest ever ancient civilization conference and our sold-out GeanKeys event. We're thrilled to see even more enthusiasm in Q4 with the recent sold-out channelingevent.

And coming up this weekend, we will have our first ever heal conference.

Finally, we're excited to announce our partnership with ElevenLabs 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 ElevenLabs advanced technology, we'll be able to reach new viewers more efficiently in the 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?

[Ned Preston, executive]

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 30, 2024, up from 790,500 or 7% from September 30, 2023.

Gross profit in the third quarter increased 11% to $19.1 million from -- 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 $0.04 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 9 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 Jirka for his closing comments. Jirka?

[Jirka Rysavy, executive]

Yes. 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 per employee and continue generating a positive free cash flow.

This concludes our remarks. I would like to open the call for the questions. Operator, please?

[Operator]

[Operator Instructions] The first question comes from Mark Argento with Lake Street.

[Mark Argento, analyst]

Just wondering if we could dig down a little bit on when you took the price increase, kind of what did you see the subscriber base? Did you get some initial churn then it moderated? Or maybe you could just talk to kind of what the experience was there.

[James Colquhoun, executive]

Mark, it's James here. So with regards to the price increase, there's 2 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 a 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 the United Kingdom. We're very impressed and we're in a good spot to see our growth rate accelerate in Q4 and beyond.

[Mark Argento, analyst]

That's helpful. And then 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 got a bunch of annual guys still in there that you still need to roll forward. But how does that kind of a percentage of the base, how does it -- kind of where are you now and where we'd be over the next couple of quarters?

[Ned Preston, executive]

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 the majority of the price increase is going to be happening in this and so that we'll see a majority of that impact for the full year of 2025.

[Jirka Rysavy, executive]

Yes, Mark. So basically, 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 the -- firstly, the 40% pretty much equally spread over the next 3 quarters.

[Mark Argento, analyst]

That's helpful. And James, you had mentioned marketplace kind of launching or relaunching in Q4. It looks to get pretty busy calendar for some live events. What's your expectations for marketplace and Gaia's -- as you roll not only Q4, but next year, how the breadth of offering there and how aggressive are you going to be in terms of margin in your fairly large 800-plus subscriber base.

[James Colquhoun, executive]

Sure. With regards to marketplace, we officially launched it in August. So Q3, we had a partial contribution there. For Q4, it will be our first full quarter of contribution. 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 head count per quarter. around 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 3 to 4x. 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 increases, we're really pivoting the organization, I would say, strategically to focus more on ARPU as well as total subscriber growth, but that ARPU and revenue growth sort of is a key focus for Ned, myself and Jirka.

[Operator]

The next question is from James Sidoti with Sidoti & Company.

[Unknown Analyst]

I heard you mentioned 2 events this quarter. Will there be more marketplace or more girls events in the fourth quarter?

[James Colquhoun, executive]

Jim, it's James here. So these 2 events will be our last event 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 1 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 yes, just 1 more event to go, and we had a sold out of that just recently.

[Unknown Analyst]

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

[James Colquhoun, executive]

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 '21 and beyond, we will be revisiting the price point for the premiums here once we build out the on-demand library in accessible to those members.

[Unknown Analyst]

And can you talk a little bit about what your expectations are for marketplace? When do you -- I know you said you think you expected to be profitable by the second half of 2025. But when do you think it will really kick in and be a significant contributor to revenue?

[Jirka Rysavy, executive]

This is Jirka. Marketplace is the first step of community. We want to introduce the community full blow in first quarter 2026. So we want to have marketing because it takes less some programming to kind of get it incorporated our system with all the experiences, which is kind of new. So we -- the goal is to make it profitable in middle of this year.

And so the next year when we launch full community would be a full contributor to the community, of course, also to revenue of Gaia.

[James Colquhoun, executive]

Okay. And that -- the launch of community that would include the Ingatan launch as well, I'm assuming?

[Jirka Rysavy, executive]

Hopefully, the launch would be before that. somewhere later in the year, this year.

[Ned Preston, executive]

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

[Unknown Analyst]

Okay. And your free cash flow 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 or existing cash you're generating from the businesses now?

[Ned Preston, executive]

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

[Unknown Analyst]

Gaia.

[Ned Preston, executive]

So with the -- as we said, 6 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.

[James Colquhoun, executive]

Yes. We're planning to refile our S3, which expire this year, as we always do, but we don't have any immediate plan to do anything.

[Operator]

The next question comes from Thierry Wuilloud with Water Tower Research.

[Thierry Wuilloud, analyst]

Just a question on the mechanics of the price rates. If you can kind of give us a little bit of a sense there. How does that you reached out to your members? And then do they have to do something or they just don't -- or as long as they don't do anything, nothing happens? I'm just curious how that -- how you implemented that.

[James Colquhoun, executive]

Terry, 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 nonconsent, whereby you send an e-mail notification to the member 30 days before the price increase. And it increases unless they go and actively on subscribe. 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 nonconsent countries, and we'll be adding the consent countries as we move into 2025. It's just a larger develift 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, 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 yes, we're excited for its impact on revenue so that we can continue to expand the brand and reach more members as we grow.

[Thierry Wuilloud, analyst]

Okay. And then maybe just a question on Events. How do you translate that into the light event? How do you translate that into maybe increase in Gaia Plus membership or just increase in overall new members or so? How do you integrate the event with your marketing program?

[James Colquhoun, executive]

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 GaiaSphere Event Center here in Colorado. But it also adds a tangibility to the experience of Gaia. 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.

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 the long-term economics of the business.

[Thierry Wuilloud, analyst]

Right. Do you have any number you can share in terms of how many attendees online? Or just any color around that?

[Ned Preston, executive]

So with regards to the membership base, like I've mentioned to Mark, we are growing that at 3x 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 would 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.

[Operator]

[Operator Instructions]

[Jirka Rysavy, executive]

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.

[Operator]

Thank you for joining us today for Gaia's Third Quarter 2024 Earnings Conference Call. You may now disconnect.