GAIA, INC Q3 FY2024 earnings call

• Third quarter was seasonally slow but saw 10% revenue growth, 11% gross profit growth, and 7% member count growth. Sixth consecutive quarter of positive operating and free cash flow, with free cash flow improving by about $1.5 million during the quarter.
• First time in history raised subscription prices for all members by at least $2, expecting Q4 revenue to rise from $22.2 million to almost $24 million. Implemented price adjustment for legacy members, expanded pilot in UK to third-party platforms in Q3, and started price increases for direct legacy members in Q4 with positive early results.
• Q4 expected to be first full quarter of revenue contribution from Gaia Marketplace, with gross margins anticipated to rise above 86% as Marketplace scales. Marketing team's focus on annual members and tenured member base led to retention improvement. Q3 highlighted impact of live events and premium membership tier, with partnerships like with ElevenLabs for AI-powered dubbing and translation services.

In the third quarter, revenue grew 10% to $22.2 million. Gross profit increased 11% to $19.1 million with gross margin improving to 86% from 85.2% in the year-ago quarter. Member count grew 7% to 846,000 as of September 30, 2024. Revenue contribution: The overall revenue from various segments showed a 10% growth, with gross profit growth and margin improvement being key aspects.

• Expect Q4 revenue to go from current $22.2 million to almost $24 million. Q4 to be first full quarter of revenue contribution from Gaia Marketplace, with gross margins expected above 86%.
• Circa 60% of member base to be fully migrated to new pricing before end of year, remaining 30%-40% to be flushed through over next year. Free cash flow positive trend to continue, no immediate plans to raise capital.

• Price increase initially led to flat member count in Q3, though expectations are positive for growth in Q4 and beyond. Expansion of pricing initiatives to different regions and platforms has associated uncertainties. Business units like Marketplace and community launch have inherent execution risks.

Q: Hi guys, good afternoon. Just wondering if we could dig down a little bit on when you took the price increase, kind of what did you see at 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.

A: Mark, it's James here. So, with regards to the price increase, there's two 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 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.

Q: 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 as a percentage of the base, how does it -- kind of where are you now and where would you be over the next couple of quarters?

A: 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 Q4 and so that we'll see a majority of that impact for the full year of 2025.

Q: Hi, good afternoon. Thank you for taking the questions. I heard you mentioned two events this quarter. Will there be more Marketplace or more Gaia+ events in the fourth quarter?

A: Jim, it's James here. So, these two 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 event just recently.

Q: And the price increases, do they impact the Gaia+ membership or were they for the standard Gaia memberships alone?

A: So currently, it's just for the standard Gaia memberships alone. We have been leaning into the Gaia+ premium tier in terms of production of content, like I mentioned, with the most events this year. As we look to '25 and beyond, we will be revisiting the price point for the premium tier once we build out the on-demand library in -- accessible to those members.

Q: And can you talk a little bit about what your expectations are for Marketplace? When do you -- I know you said you think you expect it 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?

A: This is Jirka. Marketplace is the first step of community. We want to introduce the community full blown in first quarter 2026. So we want to have marketing because it takes 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 full contributor to the community, of course, also to revenue of Gaia.

Q: 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 you're -- or existing cash you're generating from the businesses now?

A: W 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 -- is it Gaia or Igniton you're asking about?

Q: No, Gaia.

A: So with the -- as we said, six 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.

Q: Yes, good afternoon. Just a question on the mechanics of the price raise, if you can kind of give us a little bit of 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.

A: Thierry, 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 unsubscribe. 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 dev lift 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.

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

A: So Thierry, 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. And 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+ premium membership at an increasing rate, and it's healthy for the long-term economics of the business.