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Good afternoon, everyone. And thank you for participating in today's conference call to discuss Gaia Inc.’s Financial Results for the First Quarter Ended March 31, 2023. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell.
Following some prepared remarks, we will open the call up for your questions. Before we get started, however, I would like to take a minute to read the Safe Harbor language. The following constitutes to Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The matters discussed today include forward-looking statements that involve numerous assumptions, risks and uncertainties. These include, but are not limited to, our ability to attract new members and retain existing members, our ability to compete effectively including for customer engagement with different modes entertainment, maintenance and expansion of device by form of streaming, fluctuation in customer usage of service. Fluctuations in quarterly operating results, service disruptions, product risks, general economic conditions, future losses, loss of key personnel, price changes, brand reputation, acquisitions, new initiatives we undertake, security and information systems, legal liabilities for website content, failure of third parties to provide adequate service, future internet related taxes, our founders control of us, litigation, consumer trends, the effect of government regulation and programs, the impact of public health threats, including the coronavirus COVID-19 pandemic, and our response to it and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements.
With that. I would now like to turn the call over to Gaia CEO, Jirka Rysavy. Please go ahead.
Good afternoon, everyone. And I'm glad that I can again report positive results after the challenging last year when both revenue and adjusted EBITDA increased online single digit due to COVID lockdown, member cleanup. During the first quarter, we ever returned to the member growth. Gross gain from our direct membership, while the third party providers like Amazon were still negative in January and February, we added 7,500 members during the first quarter, ending with 7,666 vibrant members on March 31. With the growth accelerating during April, even membership at our third party provider started to grow again. And we expect member growth rates to increase during the year. The gross is also being helped by improve retention. In April, the member losses hit all time low, benefiting from our marketing focusing on campaign generating higher retention, rather than mostly on cost of the trial and conversion rates.
Another significant improvement become the cost per member acquisition that decreased by 13% during the first quarter as compared to fourth quarter. Marketing investment in non-English especially French and German which have lower CP and less churn is also helping. The viewing time per member started to grow again after declining since COVID lockdown ended. Lot of small improvements we did since September also start to make a positive difference. As we mentioned previously, we have eliminated over $5 million of annualized spending, which including approximately 36 headcounts mostly contractors. They were added over last two years to offset reduce efficiency we experience as a result from work from home. While some tail pay arrangement will still impact second Q cost, we expect to see the partial benefits of some saving already in the second quarter. The 20% reduction in headcount return us to pre-COVID level of operating efficiency, this annualized gross profit per employee reaching $600,000 in March.
Now Paul will talk more about specifics results.
Revenues for the first quarter were $19.6 million, a slight sequential increase for the first time in the past 12 months reflecting the return to growth in our member base during the quarter. Compared to the year ago quarter revenues declined 10% due primarily to Q1 2022 benefiting from the COVID related growth of 2020 and 2021. As we continue to invest in and release new content, particularly to support our language expansion efforts, we have increased our viewership on the exclusive portion of our library to over 85%. And as a result, and as expected gross margins were 85.9% during the first quarter of 2023, and we expect them to remain at this level for the near term.
Total member acquisition costs during the quarter were $7.9 million, or 40.7% of revenues, compared to $8.6 million in the year ago quarter. We have started to realize the benefits of our focus over the past several quarters, with per customer acquisition costs down 13% sequentially, and a similar improvement compared to the year ago period. While we continue to experience net member contraction in our larger third party distribution partners in the first half of the quarter, we have returned to growth with our largest partner beginning in March. The return to growth on both our direct member base and third party member basis during the quarter is building our confidence that we are through the worst of the post COVID unwinding.
Selling and operating expenses, excluding marketing and member acquisition costs in the first quarter were $8.1 million, which is down slightly from the prior year. Corporate and G&A expenses in the first quarter were $1.8 million, which is in line with the year ago quarter. We have implemented significant cost reduction measures over the past few months. And as Jirka mentioned, we will begin to see the benefits starting in the second quarter of 2023. We had a net loss of $1.1 million or $0.05 per share during the first quarter of 2023 compared to net income of $0.1 million in the year ago period. The decline was primarily driven by the reductions in revenues between periods offset by $0.8 million reduction in expenses. Adjusted EBITDA as a result was $3.2 million in the quarter compared to $4.8 million in the year ago quarter. With our return to member base growth during the period, our working capital benefited from a sequential increase of deferred revenue of $1.4 million, with our deferred revenues ending at $15.6 million as of March 31, 2023. We took advantage of this strong growth in deferred revenues to reduce our payables balance during the period by $0.9 million from December 31. We expect to continue to benefit from the inherent negative working capital cycle in our recurring subscription business model as we continue to grow our member base and revenues.
In addition, we will begin to benefit from the $5 million in reductions that Jirka mentioned during the second quarter and expect to be in a position to generate cash flows from operations in excess of the cash flows, we reinvest back into our content library and product enhancements going forward. Due to our in-house production capabilities, and lack of contractual commitments tied to our content production, we have significant discretion in the amount and timing of this investment. Flexibility allows us the ability to adjust our investment levels to withstand a further downturn in the macroeconomic environment, if necessary. While we're focused every day on accelerating our growth rates and getting back to positive operating margins, we have made tremendous progress over the past several quarters on key areas of the business. With continued discipline to execution and the anticipated launch of the Gaia Marketplace in July. We are well positioned to continue growing revenues and cash flows going forward.
With that, I will hand it back to Jirka for some closing remarks.
Yes, we on a track to launch the Gaia Marketplace, which focus on existing members to increase our ARPU with minimum additional marketing expenses. Technology for it was finalized in April successfully and offering will start next week and the launch should be in July as planned. For the summary, we have more cash than we borrow on our credit line as the cash balance on March 31, being $10.8 million and we expect the business to generate good cash flow for the remainder of the year. And this concludes our remarks, so I would like to open it for the questions. Operator please.
[Operator Instructions]
Our first question comes from the line of Mark Argento with Lake Street.
Hey, Jirka. Hey, Paul. Good to see a nice quarter you got. Paul, could you speak, you had mentioned deferred revenue was up, can you just walk us through kind of how that, and kind of just the mechanics there in terms of as you're doing more direct versus third party subscribers, then what's the mix of month to month versus prepaids?
Sure, so that's a good, astute observation there as we shift the member base growth from indirect members to direct members. We get the benefit of the negative working capital versus our partners collecting the money and then remitting it to us monthly. So that's a good pick-up there. And then in terms of the monthly versus annual mix on our direct member base, we're about 50:50 of the existing member base between monthly and annual. And when we look at our new signups, we vary between 25% and 30%, of new signups that convert on the annual plan versus the monthly plan.
Got it. Then in terms of pricing, have you taken any price increases or done anything on the pricing side recently?
We have not. And I think as the world is unwound from COVID, we've been watching what other players in the industry are doing. We know from prior studies that we have some room. But I think consumer preferences and comfort levels are being tested right now as people are launching AVOD models and Netflix is doing what they're doing with the password sharing crack down. So we're keeping an eye on it. And we definitely have the opportunity to move it up based on prior studies. But I think we're just waiting to see how the macroeconomic environment plays out the rest of this year before we make a final decision.
Then one last one, just on customer acquisition. Did you guys see better conversion as things kind of normalize a little bit out there? What do you see in terms of conversion or cost to acquire?
Yes, so I think it's, as Jirka mentioned, we're less focused on the cost of conversion, we're more focused on retention. And the way that we look at that is one and three month retention of our campaigns. So we're actually finding that it might make sense to pay slightly more for a given campaign based on how it retains. And then conversely, it actually makes sense to cut efficient, measured by conversion rate and CPA campaigns, because they're not retaining as well as the other campaigns. And that's really, we started that about five months ago, and this quarter reflects the early benefits of that type of tweaking of what we're doing as it relates to our spending.
As I said, our costs are actually acquisition, not the conversion, but actually member decrease 13% from fourth to first quarter, which is very significant for us. And, but it's definitely helping that our retention is better. As I said, the losses were the lowest in history with the company, so on the basis of percent, and so I'll be very happy with the result. And it's actually getting even better in April than in the first quarter. So it's very encouraging what's happening kind of they bode for us.
So that minus 13% per acquired customers or is that 13% total dollars spent down.
For acquired customer, the spend is flat, roughly.
Got it.
What we call CPA, cost per acquisition, it's, so we look at cost of the member when they, to get somebody in a trial, but we are talking actually cost of customer after they convert from the trial.
And final for me on content, what's the expectation in terms of, are you going to spend similar to last year, how does that get moderated, if any?
Well, I think we look at it as a combination of content plus product spending that flows through the investing side of the cash flows statement and part of the reduction that Jirka mentioned in terms of the contractor levels was on our development side, which was in that line. So that number is going to come down as it relates to the prior year. As it relates to overall content spend as a mix of that line, we're really evaluating if we can continue to see this growth in our foreign language markets, we might accelerate our spending there. But as I said in my prepared remarks, it's really up to our discretion of how we invest in at what levels we invest. So if we keep seeing growth, we might ramp up content and if the macroeconomic environment deteriorates, we have the ability to pull back.
Yes, we generally tried to kind of expect to, content to the revenues where we are running but as I said, our viewing, the customer viewing start to grow because we used to grow but it’s due to COVID but after COVID ended, obviously, as people start to not be hold, the viewing decline, but it started growing again first quarter. So it's a much better mark, benchmark to kind of look at new content, but generally we try to peg it to the revenue.
Our next question comes from the line of Thierry Wuilloud with Water Tower Research.
Thank you. Hi, Jirka. Hi, Paul. Nice quarter. Mark covered a few issues. But maybe just a couple more, maybe a bit more color. The acquisition costs being down, is it, are you just having more success with the existing marketing strategy? Or did you change something and are able to be more effective with the marketing dollars?
I think it's a combination of being more effective with the marketing dollars and the channels that we're already spending in, as we said, looking at it from that campaign dynamic perspective, and not just what's the cost and volume of acquisition, but what's the retention. And so that's obviously helping as we tune that. And then secondarily, we're always testing and evaluating new platforms and channels to market as we continue to try and drive growth, particularly given the privacy changes and how that's impacted marketing kind of writ large online. And that is not going to change, it's only going to continue to become more and more challenging to use targeted or hyper targeted marketing to go after customers as people pull back on their availability to share data.
And we also had several new people in marketing, especially the lead. So they start to imply their creativity, I think that plays also the role. So I think it's also credit to the people.
Great. Somewhat similar question about retention, is it the new program that you've introduced? How -- what's the breakdown between that versus maybe you lost a few members last year, now you have the hardcode members who are not going to go anywhere, what's the breakdown between actions you made versus an improvement in the kind of quality of the existing members?
Well, there are really two things, I mean first, obviously, we had very challenging microenvironment, it wasn't just us pretty much anybody on streaming, people who we get during COVID they were leaving and it was like industry wide. So that kind of ended by end of the year, actually kind of start to really come down and fully fall. But by end of the year, most of that was over. There were some other still aspects at the beginning, first couple of months, like the third part like Amazon, because they make a price change on their own so they probably kind of added to it. So that trend is kind of gone for us at least we don't see that anymore. So it's kind of normalize. But I think biggest impact is that we start to focus in by the campaign, on the campaigns, they have high retention, what was a new recruit a new algorithm but that not only cost on the conversion and acquisition and the cost of trials, but mainly eliminating campaign, they might be efficient, but they didn't lead to longer retention. So that was probably the main change we did as positive in fall. I mean, like kind of late summer, actually when we started. And it's really paying good dividends. So I think that's the main driver behind it.
Yes, and then we're always tinkering, if you will, for lack of a better term on our payment processing infrastructure and working to optimize the passive losses that we get from credit cards on file being unsuccessfully charged, particularly annual members. So that's kind of the bread and butter of what we focus on with our existing member base, because losing those people isn't an active cancellation. That's really just a credit card going stale. And so we're starting to make improvements on that line, as well. And when you think back to what I said about what our composition of monthly versus annual members is every percentage point improvement we can make on those passive losses is going to compound as we increase the volume of annual memberships so.
Okay, great. And, Paul, a question for you. The severance costs, were they spends in the quarter or is that spread over time?
It's spread over time, the way that they're accounted for, they're basically they have to continue to abide by the rules of the agreement. And so we hold the payments back and then pay them. So we didn't do an accrual. But given the fact that the majority of these were contractors, and they just needed time to wind down on their notice periods with their underlying contracts, it's not so much severance as it is just a timing artifact of when we let people know, and then how those contracts wound down.
Yes, some of the contractors fee works for companies, especially the outside of US, when we have a commitment, we have to give them notice before we can terminate. I mean, if we give them, so we committed to end of the contract, no end of the contract, but there is a notice period, so we have to pay them through the notice period.
Okay, maybe the last question on any incremental color on the Gaia Marketplace in terms of, are you getting a sense for the service providers, how they're responding, how they're gearing up for that, any, I'm wondering if you have any color around that?
I think that would be more question for first quarter, we just finished like a week ago, our technology. So be glad that was done on time, because we kind of really want to be done by in April. So it's basically it's working, we have effectively live but we didn't start selling the product. If you go on that side, you have basically just for right now just Gaia branded merchandise and stuff. So we have something working and tested. But I cannot really say on a provider's yet. But it’s kind of definitely challenge I kind of see that very positive. And it's just another part is I kind of see that a lot of things would actually happen from the cost of retention and all that stuff start to get positive. So I feel very good about our company.
Great, well, nice to see the inflection point in the member counts. That’s it for me, guys. Thank you very much.
At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Rysavy for closing remarks.
Thank you everyone for joining. And we look forward to speaking with you when we will report our second quarter at which would be like early August. Thank you very much.
And this concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.