Gaia, Inc. (NASDAQ:GAIA) Q2 2022 Earnings Conference Call August 1, 2022 4:30 PM ET
Company Participants
Jirka Rysavy – Chief Executive Officer
Paul Tarell – Chief Financial Officer
Conference Call Participants
Eric Wold – B. Riley Securities, Inc.
Jacob Stephan – Lake Street Capital Markets LLC
Thierry Wuilloud – Water Tower Research LLC
Operator
Good afternoon, everyone. Thank you for participating in today’s conference call to discuss Gaia Incorporated’s Financial Results for the Second Quarter Ended June 30, 2022. Joining us today are Gaia’s CEO, Jirka Rysavy; and CFO, Paul Tarell. Following some prepared remarks, we will open the call for your questions.
Before we get started, however, I would like to take a minute to read the safe harbor language. The following constitutes the 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 general business conditions, future losses, competition, loss of key personnel, price changes, membership growth, brand reputation, changing consumer preferences, customer acquisition costs, member retention rates, acquisitions 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’s CEO, Jirka. Please go ahead.
Jirka Rysavy
Thank you, and good afternoon, everyone. So just before end of the quarter, which ended June 30, we achieved our major milestone finalizing our 18 months effort to achieve a technology independence, which means that we now are able to operate our business on Gaia owned hardware and infrastructure. Revenue for the quarter increased 7% to $20.7 million and member count is up to nine 792,000 from the year ago quarter. However, because the second quarter is our seasonally slowest one, we pulled back on our marketing spend in the second half and had a negative member growth in this quarter.
EBITDA improved 8% to $4.2 million compared to $3.9 million a year ago, and our EBITDA margin was over 20%. Gross profit per employee improved another $10,000 to $567,000. Net income from continued operation was $0.1 million or $0.01 per share, compared to $0.6 million and $0.03 per share a year ago. This decline is really reflects the incremental intangible asset amortization from – and also some expenses from integrating Yoga International. And definitely also to finalizing our effort of our technological infrastructure independence.
And Paul will now speak more about a result.
Paul Tarell
Revenues were up 7% to $20.7 million for the second quarter of 2022. Gross margins declined slightly to 86.7% for the quarter, compared to 87.1% for the same period in the prior year. The slight decrease is primarily due to additional content amortization compared to the prior year. We experienced our first sequential net subscriber contraction ending the quarter with 792,000 members, down approximately 31,000 members from March 31, 2022, but up from the year ago quarter by 770,200 members. The decline in the member base was primarily driven by reduced marketing spend during May and June, as we experienced a shift back to the seasonal patterns, which we historically experienced each year prior to the start of the pandemic in 2020.
Prior to 2020, where we added 58,000 net new members in the second quarter, we typically saw a reduced efficacy of our marketing efforts, which resulted in lower new member additions during May through August, as people shifted into their summer patterns in the Northern Hemisphere. In addition, we have further headwinds during the quarter, as we had the second annual renewal accrue for the large number of members we added in Q2 2020 during the pandemic.
As a result of the seasonal factors, we elected to limit our member acquisition spending in aggregate for the second half of the quarter to a total of $7.2 million, or 35% of revenues to conserve the marketing spend for a more favorable seasonal period. While this led to a reduction in the number of members we added during the second quarter as a result, we remain focused on our long-term strategy of maintaining financial independence and ensuring an adequate return on our customer acquisition efforts.
We also continue to focus our efforts on building out the Spanish, French and German offerings and expanding these audiences to allow us to leverage lower relative customer acquisition costs compared to the domestic English market.
During the second quarter of 2022, selling and operating expenses, excluding marketing and member acquisition costs were $8.7 million, or 42% of revenues; and corporate and G&A expenses were $1.8 million or 9% of revenues. We incurred approximately $0.4 million of incremental technology related expenses during the quarter as we completed our 18-month project to enable technological independence, and insulate us from potential future price increases related to our legacy hosting provider.
We expect to reduce these expenses going forward as we now focus on optimizing our technology spend with the initial phase of the project having been completed. We also expect to begin recognizing the benefits of the improvements in efficiency for Yoga International we implemented during the second quarter and complete the related back office integration work by September.
EBITDA was $4.2 million or 20% of revenues in the quarter, and marks another consecutive quarter of positive EBITDA. Net income from continuing operations was $0.2 million [sic] [$0.1 million] or $0.01 per share compared to $0.6 million or $0.03 per share in the year ago quarter. As Jirka mentioned, the reduction was primarily due to increased intangibles, amortization and elevated operating expenses related to the implementation phase of the technology independence project.
Overall, net income was $0.1 million, which reflects the impact of the loss from discontinued operations associated with the legacy Yoga International transactional core sales business that we exited as part of the acquisition.
Our cash balance as of June 30, 2022, was $6.2 million, which reflects an overall reduction in our payables balance of approximately $3.4 million compared to year end. While we expect the seasonal headwinds to continue through the summer, we remain focused on maintaining financial discipline and continuing to evolve our content and marketing initiatives to support long-term revenue and cash flow growth.
With that, I’d like to open up the call for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We’ll take our first question from Eric Wold with B. Riley Securities. Please go ahead.
Eric Wold
Thank you. Good afternoon. So Paul, I know you mentioned, obviously, the return to normal seasonality and the kind of tough comps to the 2-year large subscriber add at start of the pandemic, but can you dive in deeper into the reduction subscribers? Anything in there that would be something that was surprising to you than just normal seasonal trends. Was there certain cohorts of kind of age of kind of the length of subscribers that weren’t renewing, or were not coming on anything that can give you a sense of socio-economic movements from what you can tell that would make it seem more cost-related than anything that we could go – a little more detail if possible.
Paul Tarell
Yeah. Sure. And something I’ve been paying obviously very close attention to, to discern what we think the future trends might look like. And, honestly, as I look through all of the retention data by kind of the monthly cohorts that we’ve been looking at it for the last 9-years-plus we’ve been running this business, there’s nothing really alarming that is indicative of a future problem that I see today as it relates to retention.
The biggest factor of going backwards for the quarter was pullback on the marketing spend, because we weren’t adding new subscribers, and then that’s compounded with the new subscribers that we did sign up during the quarter. We’re typically seeing in that 3-month to 6-month retention band or historical drop off that we’ve seen. So there’s no net change in the retention dynamics. It’s really a matter of the efficacy of adding new subscribers.
Jirka Rysavy
Yeah, I would add to retention. The retention actually somewhat improved, so – and it’s kind of pretty much steady or actually better than historical. So it’s really the addition to new members, it’s not the losses.
Eric Wold
Got it. Thank you. Okay. And then, Paul, you mentioned obviously the pullback in spend in May and June, given the return to kind of normal seasonal difficulty in adding subscribers. Is – how is the paid marketing environment right now? Is that still as difficult as it has been? Has it been getting easier? I guess, is it more of a tailwind or a headwind right now to normal seasonal patterns?
Paul Tarell
I would say we’re neutral as it relates to the cost of the media really what we’re seeing is the guest-to-member conversion rate has steadily declined as we’ve gone from winter into spring into summer. And that’s really what precipitated us pulling back on the marketing spend, because if you have a reduction in the guest-to-member conversion. That’s a corresponding inverse correlation to the cost per adding each member. So while the overall media is behaving relatively consistently with what we’ve seen in this time of year, the conversion rates is what we were responding to from guest-to-member.
Eric Wold
Got it. And then final question for me, maybe a larger one. I know the value of the exclusive content library that you’ve built over the years is just that. It’s exclusive, and you can’t be shown in other platforms. But clearly, it’s not getting any recognition by investors at this valuation, in my opinion. I guess, is it – does it make sense to look at other options to monetize that content in other ways, either through licensing other people, selling some off, any considerations there?
Paul Tarell
I’ll let, Jirka, answer that one.
Jirka Rysavy
Well, obviously, we kind of – since Netflix started to talk about it, as far as this year, we’re not going to do anything, we’ll see how that happened. We actually – we pretty happy with our retention, and we also finalized several projects. So, I – post the Labor Day, we’ll see how the market is and we need to do something, but we talked several times about I don’t think we would right now look right now like having like ads or something. It’s always possible. We’ll see how it plays for other players. But there is definitely a way we could potentially do something with like potentially some kind of classic television stuff as we talked before, but it’s nothing what we plan to do before end of the year.
Eric Wold
Got it. Thank you, both.
Operator
We’ll take our next question from Jacob Stephan with Lake Street Capital Markets. Please go ahead.
Jacob Stephan
Yeah. Hey, guys, thanks for taking my questions. I just wanted to focus on the customer acquisition spend just a little bit more. Maybe if you talk about the Yoga International acquisition and kind of the customer acquisition differences between the legacy and the new business?
Paul Tarell
Yeah, I’d say generally, what we’re seeing in the yoga space is that there’s been a significant return to in-studio practice, which has caused obviously some headwind for getting signups to digital online platform. But that’s really in line with the seasonal patterns that we had historically seen pre-2020. So, again, I don’t believe it’s a trend that is anything different than a reversion to what our historical patterns have been.
And, we have 2 years that we’ve all experienced and gotten used to, but there’s been a rapid unwinding of that behavior as we’ve gone into this spring and summer, and I think that’s what we’re seeing there. And, again, we’re not really in a position where we’re trying to press it. So if the return on the spend not there, we’d rather save the dollars for a time period when they are there, and more focusing our efforts on accelerating and completing that back office integration work, so that we can be ready as we go into the post-labor day period, where historical trends would tell us things start to be more favorable for adding new subscribers.
Jacob Stephan
Okay. And maybe just talk about content costs. At this point, is it still maybe a little cheaper? Or could you potentially see some synergies from acquiring more content through acquisition? Or is generating your own content still more cost effective?
Paul Tarell
I would say just generally creating our own content is more cost effective unless there’s a need to fill in parts of the library with the licensing style arrangement with the content creator, or as we’re looking at geographic expansion, I think that’s really where the build versus buy with the time component built in really tips in the favor of acquiring. But I’ll let, Jirka, add a little bit of commentary on that.
Jirka Rysavy
No. It’s – I think what Paul said is accurate. I mean – but for us, if you’re going to looking for increasing pressure on content costs as other people see it, we don’t see it at all. I think pretty much we pay same thing when we pay 2, 3 years ago, unless we kind of add more animation and stuff, so they would push it out, but it’s our decision. And we kind of peg it to the number of subscribers, but we don’t see any pressure on and either licensing or creation.
Jacob Stephan
Okay. Maybe just last one. Looking at live events, have you seen any progress with the upsell to premium subscription? And how have your live events been perceived by the public and your customers?
Paul Tarell
I’ll answer the second part first. The reception of the events by the people that attend them are phenomenal. We’re high-90s Net Promoter Score as we poll the audience, both in-person and the online audience that participates live. We’re in the kind of a soft spot in the schedule right now. So as we go into the fall, we’ll have more events coming up, and we really try to tie our marketing efforts around those events.
So we’re, again, in a little bit of a soft spot as it relates to summertime with just people getting out and traveling. It’s not really effective to try to be messaging them to significantly right now. But we’re ramping up for the fall and going into the winter around that, particularly with the holiday and gift-giving potential opportunity as we think about doing something that we haven’t historically done differently, and really focusing our efforts on that.
Jacob Stephan
Okay. Great. That’s all I have. Thank you.
Operator
We’ll take our next question from Thierry Wuilloud with Water Tower Research. Please go ahead.
Thierry Wuilloud
Yes, good afternoon. Thanks for taking my questions. Although you you’ve answered quite a few of them already. I was curious, any update on the international or foreign language effort? Is there are you seeing traction in some of those areas at that stage?
Paul Tarell
Yeah, as I mentioned in my prepared remarks, we’re able to actually still pretty effectively spend money on the languages, because it’s off of a pretty new market opportunity. So that’s allowed us to spend a bit more percentage wise than we would have ordinarily, because we pulled back on the domestic English spending. So it’s a good avenue for us to continue to invest and get a good CPA on it. But I’d say we’re still early innings and focus primarily on getting learnings and figuring out our in-language marketing campaigns, and what conversion rates and retention rates look like. But, I’d say, we’re ramping up with the expectation of being firing on all cylinders going into the fall.
Thierry Wuilloud
Okay. Great. And I was a little bit curious, I would have thought events plus would be – this could be kind of a good time of the year because, again, people are traveling Colorado is a nice destination. But you think it’s more of a third quarter, maybe end of the year, when you will be pushing that more.
Paul Tarell
Well, we’re speaking specifically of the $299 digital subscription when we talk about Events+, I’d agree with you as it relates to the events, but we’re really focused on the subscription component of it, and that’s really what we’re talking about. And now we have a pretty robust catalog now with the 13 or 14 events that we’ve had. So as we get back into the fall time period, we’ll be able to start marketing and promoting the catalog of events that are already available, while selectively sprinkling in the upcoming events.
Thierry Wuilloud
Okay. Great. Thank you very much.
Operator
[Operator Instructions] We’ll take a follow-up from Eric Wold with B. Riley Securities. Please go ahead.
Eric Wold
Thanks. Appreciate it. I guess, circling back on a subscriber trends, Paul, I guess, how much of a surprise was it for kind of the normal seasonality to come back in the quarter? Kind of from where you stood at the end – on the conference call for the Q1 call 3 months ago. I guess, any updated thoughts on kind of the run rate exiting this year versus what you thought at the end of the Q1?
Paul Tarell
Yeah, I think when we spoke in early May, the trend hadn’t solidified quite as strongly as it did as we rolled through the end of May and got into June post-Memorial Day. At this stage, I think we’re really looking at the historical pattern and not trying to predict what’s going to happen, but understanding that seasonally Labor Day and after is when we start to see the dynamic shift back. So we’re playing for that to occur this period until we have information that tells us otherwise. So no real prediction at this point, because it’s – we’re still in the middle of the summer and it’s hard to have a gauge on what to predict. But I think the focus for us is to stay positive on the EBITDA and net income side and ride this out. And so that’s really what we’ll be looking at and not trying to chase it from a spend perspective to drive subscriber growth if the dynamics aren’t there.
Eric Wold
That’s helpful. Thank you.
Operator
At this time, we have no further questions in the queue. I’d like to turn the conference back to management for any additional or closing remarks.
Jirka Rysavy
Okay. Thank you, and thanks to everyone for joining, and we look forward to speak with you and we will report a third quarter in early November. Thank you very much.
Operator
Ladies and gentlemen, this concludes today’s discussion. We appreciate your participation. You may now disconnect
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