BODI - NYSE

Good afternoon, ladies and gentlemen. Welcome to The Beachbody Company’s Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Eddie Plank, Beachbody’s Group Vice President of Investor Relations.

Welcome everyone. And thank you for joining us for our second quarter 2022 earnings call. With me on the call today are Carl Daikeler, Co-Founder, Chairman and Chief Executive Officer of The Beachbody Company; and Marc Suidan, Chief Financial Officer. Following Carl’s and Marc's prepared remarks, we'll open the call up for questions. Before we get started, I would like to remind you of the Company's Safe Harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC, which includes today's press release. Today's call will include references to non-GAAP will include references to non-GAAP financial measures, such as adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on our website. Now, I would like to turn the call over to Carl.

Thank you, Eddie, and good afternoon, everyone. We're very proud of our performance in the second quarter. We were able to adapt quickly, focus and execute in the face of a challenging macro environment. And as a result, we delivered revenue in line with our guidance and adjusted EBITDA that was ahead of our guidance, reflecting continued progress on our strategy to make Beachbody more efficient, effective, and productive. With laser focus on execution and cash flow management, we achieved material savings in the second quarter, reducing cash burn by nearly $38 million and lowering operating expenses by more than 20% compared to the first quarter. This reflects increased variability within our cost structure and continued expense discipline. As a result of these actions, we ended the quarter with $57 million of cash on hand. In addition, today, we announced that we entered into a $50 million debt financing agreement with Blue Torch Capital, with the potential to increase by another $25 million. The transaction will enhance our financial flexibility as we continue to execute on our strategic goals. During the quarter, we also focused on profitable customer acquisitions through new content releases, our highly effective proprietary sales network and disciplined marketing despite continued softness across the industry. These results reflect solid initial progress on our one brand strategy. This strategy, which we initiated at the beginning of the year, demonstrates our ability to adapt quickly to economic realities. The one brand strategy isn't just about costs. It's about unlocking the full potential of our massive category and our unique assets. As we consolidate the great content of our platforms and leverage the subscriber scale of Beachbody on demand. Last month, we reached an important milestone as we completed the migration of all our content onto the Beachbody platform, adding 20 additional programs and roughly 1,000 standalone workouts, all in a single day, creating the largest content drop in our history and adding to our already significant library of evergreen content. This considerable library of assets is what powers our flywheel, where each program title can drive new customer acquisition, customer engagement, and ultimately, brand loyalty. We also delivered profitable subscriber acquisition and nutrition upsells with three recently launched programs, 4 Week Gut Protocol, Fire and Flow, and 4 Weeks for Everybody. These strategic offerings, both bolster our future category and market potential over time and can drive immediate revenue and expanding the LTV of our current customers. As you know, in tough times, strengthening and expanding relationships with current customers is key. In the third quarter, we're continuing to grow our nutritional portfolio with the introduction of the First Thing and Last Thing supplements, a nutritional combination that's ideal for customers looking to improve overall wellness, improve mental clarity, reduce stress, and improve sleep. These completely unique new products represent a powerful lever to drive both LTV and near-term revenue as we market to existing customers who are predisposed to buying what Beachbody develops, because they appreciate the quality of our product line. We also recently launched another fitness program called LIIFT MORE, a program that features super trainer Joel Freeman, and is the follow-up to his highly successful LIIFT franchise. Response has been very positive, especially as we see men and even couples choosing to follow this eight-week program together. With respect to connected fitness, we also continue to drive higher LTV from demand for bikes across our subscriber base. Our focus remains on creating great indoor cycling content and an experience that is tied to our broad and deep content library, and at that content, not price, which creates the distinct Beachbody biking experience. Heart rate-based training with great content is our unique selling proposition. And ultimately, we are a platform powered by content and experience and devices like the bike are the conduit to that experience. And soon, we'll be making it even easier for customers to join our ecosystem with an extremely compelling digital subscription offer, but we'll talk a little bit more about that later in the year. Now, turning to marketing. During the second quarter, our coach network continued to serve as a powerful and profitable driver of acquisitions and nutrition subscriptions with high levels of motivation and excitement around this year's launch calendar. While we're pleased with our coaches' enthusiasm for reaching more people this quarter, we continue to pilot new incentives and training programs to enhance their role as brand ambassadors. For instance, with the recent launch of LIIFT MORE, we offered a select group of coaches the opportunity to participate in what we call a BOD group. That group completed the program with direct coaching and guidance from Joel Freeman, which has enhanced their ability to represent the program to their prospects. And a few weeks ago, we mobilized more than 15,000 coaches as part of our annual summit. It was our first summit in three years, and it was clear as we left St. Louis that the coaches were invigorated and excited about our substantial category potential, our offerings and the meaningful difference we can and do make in millions of people's lives. Our coach network is profitable and productive, providing a foundation for future success that no one else can replicate. Given the income earning opportunity for coaches, this proprietary sales channel also provides some countercyclical momentum to the business during these times of economic uncertainty. During tough times, Beachbody is even more valuable to our coaches and the income we provide becomes more important to offset pressure from higher costs or as a way to offset loss of income in other parts of their lives. But as you know, we have an omni-channel revenue strategy. Throughout Q2, we continued to successfully execute our direct-to-consumer marketing strategy, bringing our average CAC down by over 40% versus Q1 and achieving immediate cash payback on our media investments. LTV for our subscriber base remained strong with a significant portion of new customers signing up for our annual membership. And we continue to capitalize on multiple levers to enhance LTV. During the quarter, we increased the price of BOD subscriptions by roughly 20% with no material impact to conversion rate, reflecting the strength of our product offering and our ability to drive profitable subscriber acquisition through target marketing. We've also seen continued success in increasing LTV, as we upsell our premium BODi experience to existing Beachbody on Demand subscribers. Our BOD users have some of the highest levels of retention across our user base, and we're expecting that part of the subscription to become a central part of the value equation in the months ahead. And with the completion of our platform consolidation this quarter, we'll now be able to market our entire suite of products, including Beachbody supplements to our full user base for the first time, representing an important opportunity to drive enhanced LTV over time. Looking to the second half of the year, we're taking a prudent view of the environment, given our expectation that demand patterns for at-home fitness could remain variable in the near term with greater levels of uncertainty around the broader economic climate. Regardless of the macro backdrop, we’ll continue to focus on profitable acquisition, generating demand through our compelling cadence of new releases and tightly managing expenses. I'm incredibly confident in both, our ability to manage through any near-term pressures, as well as taking advantage of the significant opportunity that remains over the longer term. Specifically, we're operating in what is still a large and under penetrated market. The global dietary supplements market was $151.9 billion in 2021, and is expected to expand at a CAGR of 8.9% from 2022 to 2030. And the global home fitness category is expected to grow to $21.8 billion in 2026 at a CAGR of 9.6%. With more than 2 million subscriptions, our scale is significant in the at-home fitness segment. And our model, which is powered by content and supported by nutrition and community is unlike anything else in the market. We're confident we can continue to generate demand with our content-driven model that allows us to pivot quickly to capitalize on emerging trends and need states. And as the future of health and fitness becomes more digital, our unique value proposition is particularly compelling, given the simplicity of one platform and our suite of integrated fitness and nutrition products. And finally, we have a strong and collaborative management team in place with clear alignment on our objectives and all working from the same focused playbook. We've made several additions to the team recently, including Marc Suidan, who joined as CFO a few months ago. In his first quarter as CFO, Marc has provided significant, strategic and operational insight, identified additional opportunities to enhance efficiency and served not only as a thought partner to me, but also a real leader to the finance organization. His experience and perspective are already proving to be invaluable in delivering on our strategic goals. In addition, we recently promoted Kathy Vrabeck to the role of COO. Kathy joined Beachbody last year as Chief Strategy Officer and played a central role in a number of key initiatives, including the development and execution of the One Brand strategy. She also brings with her extensive experience in the technology and consumer sectors, including senior roles at Electronic Arts and Activision. Likewise, Irfan Ranmal has taken on an expanded role as our Chief Product and Technology Officer. Before joining Beachbody, he held key leadership roles at Disney, Hulu, Activision, and DirecTV. Uniting our product, data insights, and technology teams under his leadership has allowed us to make better and faster decisions and more fully deliver on the power of our digital platform. Let me sum it up with this. My confidence and the confidence of our leadership team is unwavering. In fact, our management team collectively purchased more than $6 million worth of shares on the open market during the second quarter. We did this as individuals for one simple powerful reason. Beachbody’s future potential is massive. The actions we're taking to make the business more efficient and productive, such as reducing our cash burn and increasing the flexibility of our cost structure are allowing us to navigate the dynamic near term environment. And with a strong leadership team and a commitment to continued innovation, we are incredibly well positioned to capitalize on the significant opportunity ahead. So, with that, I'm very pleased to turn it over to Marc for more detail on our performance in the second quarter.

Thanks, Carl, and good afternoon, everyone. It is my pleasure to join today for my first earnings call as the CFO of The Beachbody Company. Before joining the Company, Beachbody always stood out to me as a source of inspiration for getting people healthy and fit, with an impressive track record of developing amazing content that turned the trainers into household names. And in my short time with the Company, I've been impressed with its strong, collaborative culture, willingness to evolve and commitment to win. As Carl mentioned, we are operating in what is still a significant addressable market that remains largely underpenetrated. And we have the right ingredients to see that opportunity, including the best fitness content and programs, a powerful coach network and the advantage of being the only company providing a total fitness and nutrition solution. Since I started, my focus has been on improving our profitability in getting the Company to be free cash flow positive, and we have made meaningful progress this quarter. As a result of our swift actions to pull more cost out of the business, we materially reduced cash burn to roughly $6 million in Q2, a nearly $38 million improvement versus the $44 million we spent in Q1. And we delivered adjusted EBITDA that was not only ahead of our guidance for the quarter, but significantly less than the loss we recorded in Q1. We have also taken steps to increase the variability of our cost structure. As a result, 75% of our costs are now variable, giving us greater ability to flex with changes in revenue. Looking ahead, I'm also confident in our long-term revenue growth opportunities. Given the environment we're going to do more to manage costs in the meantime. To that end, I have begun a thorough review of the business, and I've already identified several additional near-term opportunities to improve profitability moving forward. Here are two preliminary examples. First, optimizing the SKU count in our nutritional offering. To improve our gross margin, we will reevaluate SKUs that don't meet our strict price and profitability thresholds, or that are not reflective of market demand. We are also testing targeted price increases as we deal with industry-wide cost inflation. Second, managing operating expenses very tightly while continuing to invest in our transformation. Among other things, this effort includes optimizing our distribution network, moving more processes to the cloud, implementing strict spending controls and reevaluating how we manage international markets. In the coming weeks, I will continue these reviews with the goal of identifying and implementing additional initiatives to refocus, simplify, and strengthen the business as we progress through the balance of 2022 and into 2023. Now, turning to the details of the quarter. In addition to comparing our results to last year, I would also reference comparison to the second quarter of 2019 where it's helpful. Total revenue was $179.1 million, which was in line with our guidance. This reflects the ongoing shift in consumer priorities that our business and industry have been experiencing. Please keep in mind that the decline in sales is also partially due to our deliberate focus on profitable customer acquisition. Digital revenue was $78 million, which was a 17% decline from last year. Similar to last quarter, we had a reclassification of business service fees from preferred customers out of digital and into nutrition and other revenue. Adjusting for this shift, digital revenue would've declined by 8%. Digital subscriptions decreased 16% year-over-year, as we cycled two years of strong growth through the height of the pandemic. However, when comparing to our pre-pandemic baseline, digital subscriptions continued to show solid growth of 35% over the second quarter of 2019. Engagement or DAU/MAU was down versus last year, but increased by 140 basis points compared to 2019. Quarterly retention levels increased over last year and Q2 of 2019, demonstrating our ability to retain subscribers through continued content innovation. Nutrition and other revenue was $90.5 million, down 30% compared to the second quarter of 2021. Part of this decline correlates to the decline in digital subscriptions. Digital subscriptions along with new product launches drive our nutrition business. Looking ahead, as we have now lapped the toughest comps of the pandemic period, we believe our solid pipeline of new products, enhanced cross-sell and upsell initiative and efforts to simplify customer choice to reduce SKU counts should support improved demand and performance moving forward. Connected fitness revenue was $10.6 million with 8,800 bikes delivered. We continue to see higher engagement in the second quarter amongst digital subscribers who own a bike versus those who don't own a bike. This is an encouraging trend that reinforces our belief that the connected fitness business is a valuable contributor to LTV. Gross profit was $87.3 million or 49% of revenue in the second quarter versus 69% last year. Roughly 75% of the year-over-year reduction was related to the negative margin in connected fitness. Digital gross margin was 76.4% and declined 1,130 basis points versus 2021, primarily due to higher content production cost and the timeline with which these costs are amortized. The biggest increase within digital COGS was from the launch of BOD Interactive. Additionally, roughly 300 basis points of the decline related to accelerated depreciation and program amortization in connection with our One Brand digital platform consolidation. And finally, the business service fee reclassification I mentioned earlier had roughly 200 basis points negative impact, given the high margins of that revenue. Nutrition and other gross margin was 53.6%, a 210 basis points decline from 2021. Most of the change was driven by an increase in depreciation expense for technology initiatives to support our nutritional product sales along with ongoing pressure from higher product cost and shipping expense. These offset the margin benefit from the business service fee reclassification. Moving forward, as we review the nutrition portfolio, we believe we can uncover opportunities to improve margins at the product level over time. Connected fitness gross profit was negative $20.9 million. The majority of this was due to $15 million in non-cash expenses we incurred for inventory reserves. Also, our connected fitness gross profit continues to be impacted by higher shipping, freight, and warehousing costs, given ongoing supply chain pressures. Total operating expenses decreased approximately $53 million or 29% year-over-year to $131.7 million, as we continued our migration to One Brand. In particular, we significantly reduce our media spend in line with our high-return, low-risk customer acquisition strategy. As a percentage of sales, our selling and marketing expense decline over 14 percentage points compared to Q2 2021. Sequentially, this was a 19% reduction in spend compared to Q1. The media was not the only area where we generated savings. We also reduced our enterprise technology and development cost by 28% versus the first quarter. And since the beginning of the year, we have reduced our total headcount by more than 25%. All this contributed to a materially improved adjusted EBITDA loss of $1.5 million in the second quarter. Our net loss was $41.9 million or negative $0.14 per basic and diluted share. With respect to the balance sheet, as I said, we made significant improvements in our cash burn in Q2 and ending the quarter with an unrestricted cash balance of $57.1 million and no debt. In addition to lowering our operating expenses through the One Brand strategy, we also reduced our inventory position and our capital expenditures in Q2 compared to Q1. Looking ahead, we will maintain a strict cost and cash discipline approach. This includes identifying additional cost savings opportunities with a solid cash position and significantly improved cash burn rate. We are confident in our ability to manage the business through operating cash flow while continuing to make select strategic investments in our technology platform that are critical to supporting our long-term success. However, as Carl mentioned, we also announced that we have taken the deliberate step to enter into a debt financing agreement with Blue Torch Capital for $50 million, with access in additional $25 million facility. The transaction enhances our liquidity position and provides us with flexibility. Now, I'd like to take a moment to discuss our outlook for the remainder of 2022. As we think about the back half of the year, it's clear that the consumer post-pandemic mindset persists with people preferring to be outside and travel. And the pressure of a high inflationary environment and recession fears are beginning to weigh on the consumer spending patterns, all of which is increasing variability in demand trends. As a result, Q3 got off to a slower start than anticipated, and we expect the top-line to remain under pressure in the near-term. As we navigate the softer demand environment, we will remain hyper-focused on cost management. With respect to profits and cash flow, our plan calls for gradually stemming our cash burn and returning to positive adjusted EBITDA and free cash flow over time. However, as we said last quarter, we don't expect our improvements in profitability to be linear quarter-over-quarter. For instance, in the back half we'll incur expenses for new employee hires, merit-based compensation increases and tech investments to position the business for the growth that Carl referred to. That said, we expect to show a meaningful reduction in losses for the remainder of the year when compared to 2021. Taking all this into account, for the third quarter of 2022, we are guiding as follows: Total GAAP revenue of $150 million to $160 million, and adjusted EBITDA loss of $15 million to $20 million. Please note that in addition to the factors, I just outlined, our Q3 guidance also reflects an incremental $7 million in expenses related to our annual coach summit event in July. Finally, we now expect to realize a combined adjusted EBITDA improvement and CapEx reduction of approximately $110 million to $120 million in 2022 versus last year. To wrap up. Although, the environment remains challenging, we are committed to taking action to return to positive cash flow, drive profitable growth, and create long term value. We believe our focus on aggressive cost management through the back half of this year will set the business up for future growth and profitability as a leaner, more agile organization. With that, operator, please open it up for questions.

[Operator Instructions] Our first question comes from John Heinbockel with Guggenheim Partners.

Hey, Carl. I wanted to start with -- when you look at the sort of the gross and net digital sub change, right? So, digital subs continue to drop off a little bit. So I assume, the bulk of that is people dropping out, right? You continue to add new subscribers. I'm curious. So, if you're down a couple of hundred thousand, are you adding 300,000,400,000, 500,000 and then seeing more than that drop off? And then as part of that, I know you're not getting much pushback on price, do you think at least in the short run, because of the pricing actions you're taking, maybe the subs drop off a little bit more between now and year end?

Thanks, John. You're right. The -- lapping the sort of the swell of the pandemic is creating these optics. And likewise, as we discussed in the opening remarks, we're seeing just an uncertainty in demand in the fitness space and particularly the in-home fitness space. That's why it's so important that our cost structure be variable as we manage our way through uncertain demand patterns. But, you're right, the cadence of launches that we scheduled for 2022 are tip of the spear for bringing in new subscribers. We're very pleased with the fact that the price increase has not had an impact on conversion. And I would say that in general I think it's going to be steady as she goes. I don't expect to see any -- like I can't expect or forecast any dramatic difference in our subscriber acquisition, except we'll continue to pursue it in a way that is profitable. And that's, what's a little bit different than the back half of last year where we were really -- we were spending into growth. And since the first quarter, we've stopped reaching with increased cost of acquisition and instead are now back to our free cash flow model, which has really served the Company so well for two decades. Does that make sense?

Yes. And maybe as a follow-up to that, in trying to figure out the floor on membership and revenue, so, digital subs, I guess they were 1.9 million 1Q ‘20. So, are you comfortable that we will not go back to the 2019 levels, there's some permanent customer acquisition here? And I guess, now we are tracking below ‘19 revenue, but that's largely on the nutrition side. And I guess that's fine. But digital revenue would similarly not likely go back all the way to ‘19. How do you think about the floor here on subs and digital revenue?

Yes. I think that's -- I think you've got that right, particularly because we've added the BOD Interactive subscription to the portfolio, which is frankly, the bright spot in terms of what we're seeing in terms of engagement and retention. So, with the addition of that live interactive layer I do expect to see continued growth in that one area. Now, I can't -- I don't want to send a signal that I can identify the floor, but I believe that we -- like I said, I think we're in a very stable place based on our recruiting metrics within our coach network and frankly, the very strong performance of our direct marketing activities, which in many cases have outperformed our expectations. So, I think that the current state of things is a fairly reliable place to be. Obviously my goal and my job is to grow it from here. And I think we've got some good levers to work with there. And I do think that the business is stabilized is the way I would characterize it. And like you said -- go. Go ahead, John. Finish.

No, go ahead. Finish.

All right. Well, what I would say, like you said, the difference in revenue coming from the nutritional files is obviously something that we needed to address. In 2019, we had a simpler offer structure, which we were sort of following the trends in the digital domain where you give people more choice for customization. But what we found in the fitness and meal planning and supplement category is people actually are looking for a little bit more prescriptive approach and variety perhaps is the enemy of decisions. So, we are simplifying that as we've also taken friction out of the funnel, we're also taking some choice and making a very specific recommendation. This is part of what we learned in the first half of the year with the successful launch of 4 Week Gut Protocol 4 Week Gut Protocol and its very specific recommendations. We're repeating that in the second half of the year. And we believe that will have a favorable effect on regrowing the nutritional files, as we make it more clear what our recommendations are to the subscriber.

And one -- just one last quick one, and then I’ll leave. And I asked you this last time, right? Any thoughts on how you can de-risk connected fitness more in terms of -- and I know you outsource a lot of that, but in terms of getting the inventory and some of the capital off the balance -- off the balance sheet and the P&L, is there a way to do that or there just isn't?

Well, the -- sort of the storm has passed us. We've got the inventory, and we're actually in a very good position because we don't -- we're not in a position to have to support factories and purchase more inventory. We've got the inventory. The customers are retaining very well and are having a great experience. What we've done, John, is pivot the business model. And what we're doing with the inventory that we have is focusing on creating great content and selling that inventory into the millions of subscribers who are already enjoying this content. So, that's our focus, because obviously we don't have to chase a cost of acquisition like we do out in the open market, if we're trying to start a subscription with a bike. That's when we get into the price pressure problem. But, the inventory sits there. And as you said, every time we sell a bike that benefits the balance sheet. We don't have to go into our pockets to bring more inventory over. So, the connected fitness business is sort of steady as she goes. It's our job to make great content and make a good business out of it and satisfy the super consumers who we already have in the database.

Thank you for your question. Our next question comes from Linda Bolton Weiser with D.A. Davidson.

Yes. Hi. So, can you just clarify, Marc, the kind of guidance statement that you're making for 2022 in terms of the improvement that you're expecting to make? Has the definition changed? Because I thought before it was EBITDA minus CapEx minus cash spent on content, and that would improve it. Are you changing that definition? It looks like here, it says EBITDA minus CapEx. So, it looks like it's different. So can you just kind of clarify that guidance statement?

Yes, absolutely, Linda. The definition remains the same, so EBITDA less CapEx for technology as well as content creation. When we look at what was spent in 2021 versus how much we will spend in 2022, there will be $110 million to $120 million reduction.

Okay. So, I think on the last call and in the last press release, you had actually improved the outlook to $120 million improvement. So, I guess, this is a, maybe a little bit of a step back. So, is that just kind of maybe a little bit of a result of a caution over the macro environment in the second half, or is there some particular element of the cash spend that has changed to make you a little more cautious on that improvement for the year?

It’s more the former, Linda. I mean, we've dramatically reduced our cash burn. We're managing our cost really aggressively. But as you can imagine, just being a bit more prudent with the outlook going forward from a revenue standpoint could impact contribution margin. So, I think it's just accounting for that.

Has your -- I know you haven't really given a lot of specific numbers, but in general, has your outlook for cash spent on content creation, has that changed versus last quarter? Is the projection higher or lower than your previous projection?

It's actually coming down slightly. We have a baseline for the cadence -- this is Carl by the way. We have a cadence of product launches, which that generally is coming in at slightly below budget. But, we are seeing some savings as the live content BOD Interactive has matured. So, we got it launched. We've seen where there are certain efficiencies that we can pick up, and in the back half of the year, we expect to realize some of the savings from those activities, which are ongoing creation of live content as we refine that system. So, it's getting better as that part of the business -- as we start to understand what's important to the subscriber and what's not important.

And then, I think on the last call you had talked about there being seven major launches in 2022 versus many fewer last year. Can you maybe tick off, like which ones have occurred so far in the first half? And then how many of those seven are still remaining to occur in the second half?

Yes. So, we are in the middle of a launch right now. So, I will say, so far this year, we've got -- we've had the job one, launch, with Jennifer Jacobs. We did a niche program called 2B Pregnant, which was a nutritional program at the top of the year. Then, we went into 4 Week Gut Protocol, which was a gut microbiome improvement program with its companion four weeks for everybody fitness program. And that performed exceptionally well. Then, we had Fire and Flow in the spring, which was the first time that you put an intense program with anxiety reducing every other day, an anxiety sort of relaxation program. And like I said, we're right in the middle of this LIIFT MORE launch. We also had the -- while it doesn't count as one of the content drops, we did move all of the Openfit content and live rides over into the Beachbody library in July, which was our largest content drop ever, and our subscribers are loving all that additional value that they got with no additional cost effectively. And then, we have our first launch on the Beachbody platform with the most popular trainer from Openfit. Her name is Andrea Rogers with a cardio aerobics dance program in October. Then we have the new program called -- well, I’m not allowed to say actually what that is, but we have another program coming in December, which will -- no, we already announced it. It's called Sure Thing. We announced it in July. Now, within that we also have complemented our nutritional offerings. And like I said, we are focusing the first transaction with the customer into the primary nutritional that got people results with that program. So, for instance, on the LIIFT MORE, which is the lifting program, we're recommending what is called the performance stack, which includes a pre-workout and a post-workout. So, we're very prescriptive about what's right for that, with the program called XB Sweat and Sculpt from Andrea Rogers, this October will be prescriptive about a combination of Shakeology and pre-workout. And then we also have two seasonal Shakeology flavors coming in the second half of the year, one is chocolate caramel brownie and then we have a beach bar, which is a chocolate mint beach bar, and the other Shakeology flavor is vanilla chai. So, a lot of stuff coming in the back half of the year, it's definitely more launches than we normally do in one year. And that gives our coaches a lot of things to stay active about on their social media channels.

Okay. And then, can you just say -- I think my understanding was that seasonally third quarter revenue for the whole company is usually higher than fourth quarter. So, is it fair to say that if you're projecting one $150 million to $160 million in third quarter, that fourth quarter will be lower than that?

Linda, we're not giving guidance on the fourth quarter yet just given the demand environment. But what I would say is generally speaking, yes, it is usually a strong quarter, but with this whole post-pandemic situation, people wanting to be outside, we're being very diligent also in our marketing spend so that we get immediate paybacks. So, that's why we're guiding this way. I don't think Q4 will be materially different than Q3 at this stage. But…

One of the reasons -- sorry, Marc. One of the reasons for that is traditionally, one of the biggest launches for us of the year happens in December, as we go into the new year. So, we get the benefit of what we call our leadership event, which is a big event for our coaches that happens in October, then there's the couple of new nutritional launches that happen in the fourth quarter, and this big launch. So, I will say that the two generally seem to be shaped the same way. That's been our sort of experience because of the strength of the back half of the fourth quarter.

Okay. And then, finally, so is my understanding in terms of this new debt financing that you will actually put that debt on the balance sheet? Is that correct? And if so at what interest rate is that?

Yes, Linda. So there's two components. There's the $50 million, we'll put that then on the balance sheet, and then the access to the additional facility is subject to additional terms and will not be put immediately on the balance sheet. On the first $50 million, the interest rate is SOFR plus a component of cash and pick. The cash is 7.15% and the pick is 3%. And what I would say is this all about creating liquidity on our balance sheet. This is -- we remain confident and comfortable that we could fund our operations through existing cash flows. This is all about just precaution and liquidity management.

So, you're saying the interest rate is essentially SOFR plus 8%ish.

SOFR plus 10.15, if you add the cash component and the pick.

Got it. Okay. And can I just ask you -- the other weight loss companies, Weight Watchers Metafit, [ph] they haven't been doing so well either, and they have different problems. I mean, Weight Watchers has membership as they're not gaining any membership whereas retention has been good and Metafit. They're finding retention has fallen off, because people don't want to order the second month of food. So, if you had to characterize maybe your business in terms of the consumer and how they're behaving, like maybe you could give us a little color. Is it more new membership growth or is it more the retention that's suffering? Like, what -- give us a little bit more color on kind of what you're seeing?

Yes. I would say that it's really a -- it's a really good question. I think that primarily the activity of our network has had more headwinds from this current environment, as any direct-to-consumer company would have, exacerbated by the complexity of the nutritional offerings that we made, which -- that is what we're improving. Because we gave so much, this is just a real consumer facing merchandising issue that -- you've got this volunteer sales force effectively. They're not employees, they're just trying to do their workouts and inspire people on social media and what then those people who are like, hey, I'd like to do what you're doing. They come in, they got a more complex offering as we've gotten more diverse with our product offering. And that's what we feel like, once -- what we saw from the 4 Week Gut Protocol program is we were so prescriptive and so specific about what to get that that program really hit its strides. And the other ones where we're sort of offering a more -- a broader suite that -- again, this isn't a sophisticated sales force. These are people just regular people like me, just trying to get their workout on and put every little group together. And then when it comes down to, well, which supplement should I use? They're really relying on the Company to be prescriptive. And that's what we're fixing in the back half of the year and into 2023. So, I would say it's -- this relationship of a bit of the environment that we're in, as Marc said, people are traveling. Now's not necessarily time to be pursuing body transformation because you don't know how long you're going to be able to be out and about, and on the other hand, some of the weakness or friction in the merchandising that we're cleaning up.

Our next question comes from Kaumil Gajrawala with Credit Suisse.

I guess, first a question on liquidity. Is there -- with the increased funding, are you now -- looking with the, I guess, changes in your CapEx and your cash burn rate, are you now past the point where we're thinking about if there's six months of liquidity left or 12 months of liquidity, do you think this is sufficient, or is there a timeline and perhaps you have to come back to the market at some in near future?

Yes. Kaumil, look, what I would say is we already felt that we didn't need cash, additional cash to make the changes we're making in the business. So, when you look at how we materially reduce our cash burn down to $6 million this past quarter, really the increment going forward is a lot more controlled from our part to make changes to our platform, to position it for growth. And so, this liquidity we've created with this debt facility is actually not to get out there and spend it and fund our operations. We're funding all that through existing operations, all the changes we're making. So, I think honestly it's just a safety net, so we don't foresee going out and needing any more capital.

And then, can you talk maybe just a bit about the trends you're seeing on customer acquisition and such particularly you're in the middle of this large launch, what does the costs look like in this environment versus what they might have looked like a year ago? Just giving us kind of a general sense on is it getting more expensive? Is it getting more efficient? Can you just maybe talk a bit about what you're seeing there?

You mean the cost of acquisition?

Yes. Customer acquisition, sorry.

Yes. That has remained steady quite honestly. And it's not the primary driver of the business. The primary driver of the business is the flywheel is we create great content. That content is put in the hands of people who love what Beachbody does, they're called our coaches. And they put groups together that bring people together to go through that program. In this case, LIIFT MORE is an eight week program. The cost of acquisition in the coach network are all direct, meaning we don't experience those costs unless a sale is made. So the only question is, is demand sufficient. And we're very pleased with how LIIFT MORE is doing here. It's not the -- you wouldn't normally think as the summer as being the peak of fitness and weight loss season. The approach that we took with this, because it's a sequel to one of our most popular programs called LIIFT 4 really been to lean into this concept of the people who love LIIFT 4 to follow on with this sequel. Our network of coaches is primarily female. So, it's been great to see that this particular program is also appealing to men and couples are doing it together. So, as we -- here we are in the first week of August or so. We're actually pleased to see how that program continues to sell. It was launched in the last half of July, and it continues to create demand, but in terms of the cost of acquisition, that is pretty much fixed because it's transactional.

And, and Kaumil, what I'll add to that, if you compare it to a year ago, our selling and marketing expense went from 62% of revenue down to 48%. So, in that you have that very variable component that Carl's referring to in the coach network. And then the balance around what we spend in the media space is highly disciplined. That we’ll evaluate if we've been too aggressive there, because we've been very, very diligent and aggressive payback. And then, our third route to market is obviously cross-selling into our own database of 2 million customers. And that I'd say we're -- I would say, honestly, we're refining and improving, because there's room to do a lot better there and we're working on it right now.

Okay, great. And then with every company we're trying to -- the Street's trying to work out, what would be the implications of a recession. You guys have been around for a while. I respect that your business is a little bit different today than it would've been during the last few cycles. But can you maybe just talk about what you've seen in the past when you're in a recessionary environment?

Yes. Well, that's -- if there's one thing that I'm -- after a couple of decades in this that I'm proud of about this company, we've been through three of them, three downturns. And we -- first, I would say any responsible CEO is never going to take for granted how you're going to do, because you don't know what the demand patterns are going to be in any recession. But we have been fortunate enough to find great opportunity in those recessions, because you've got on one hand, people who are perhaps looking at their monthly spending and going, yes, do I need this a $100 or $200 a month fitness membership? And as they're moving, as they're perhaps tightening their belts a little bit. That's when they might move over to a more cost-effective in-home digital solution. And we've benefited by that a number of times. Likewise, our coach network actually gets more productive in a recessionary environment for two reasons. One, the household is trying to offset higher prices from inflation, but also contraction in what might have been their primary income has this requirement of motivating them to be a little bit more aggressive about how they might get productivity in helping other people get started with a Beachbody membership. So, we sort of get this little bit of a tailwind that happens because of where we sit in the economics of a recession. But like we can look back to 2008, 2009, we actually experienced double digit growth back then. And I don't see any reason for us not to, if we're smart to possibly be the benefactors of the economic environment.

Our next question comes from Jon Komp with Baird.

Just one follow-up on the guidance, to start, Marc, would you be willing to just clarify what you're expecting for the adjusted EBITDA loss piece, and then the cash usage piece just within the comments that you've given for the guidance?

Yes, absolutely, Jon. Look, I'll say -- one, I would say most importantly, the cash usage would likely be comparable to the adjusted EBITDA. That's number one. Number two, like I stated, we do have a $7 million expense in that Q3 that relates to our coach summit, that's one time. So, that's -- those are two things I would say, but cash usage would probably -- likely be comparable. And frankly, a lot of this does relate, like I said, to our deliberate and controlled investment in our platform and some of the changes we're making that Carl spoke about as well.

Maybe just one follow-up, if I could. It looks like the cash outlay for property and equipment for the year was about $19 million in the first two quarters. Could you maybe further break down what that's attributed to and then what should that -- the full-year number be comparable to that $19 million?

Yes. Look, Jon, we could dive into more specifics, but what I could tell you is year-over-year, there's definitely substantial reduction and the -- because there's the technology component and then there's a programming component. So, let's set up time we could run you through the details of the numbers and give you that visibility.

Okay. Sounds good. Maybe one broader question then, just going back to the cash question. But when you have expressed your confidence and sort of the current trajectory that you wouldn't need cash necessarily, could you just comment on sort of what what's supporting your confidence? And if you look at that business, as you see it today, like how many quarters out are you until you would expect positive cash generation for the business?

Yes. So, so Jon, our -- looking at how we just reduced the cash burn from $44 to $6 million in one quarter, it just demonstrates that we have the ability to control our cost structure, right? And as Carl said earlier, and I said, in my comment, 75% of our cost structure has been variablized. So with that in mind, the deliberate investments we're making, if -- we could slow them down when we want, right. So, that would give us additional flexibility if we need. And then, all the initiatives I spoke about around nutrition, pricing, skew rationalization, looking at our distribution network, moving processes to the cloud, all these things. I spoke about the benefits of all those kick in ‘23. So, that's why I said we feel pretty comfortable that we could fund the business through existing cash flows, not through the borrowed borrow money, if that makes sense.

And just for the revenue piece of that comment, if your business trended closer to 700 million from a run rate, top line revenue perspective, would that be enough to where you could adjust the cost basis to be profitable, or I'm just trying to get a sense of how much flexibility that you're applying?

Yes. Look, I will tell you, John, we're obviously still -- this is a healthy growing market, right? There's some short-term headwinds coming out of the pandemic in the -- let's say the upcoming recession, but long term, we're still believers in the long term growth of this market. So, we're still investing to position the Company for growth. But if that doesn't come through, yes, we could definitely control our cost structure to deliver a profitability at that level.

Okay, appreciate all the comments. Just maybe last one, Carl or Marc. I'm just curious, what have you seen in the coaching network? I don't know if you can share kind of numbers of coaches and how that's changed and some of the changes within the network over the past few quarters, or is there sort of a natural headwind just to growing the business until you anniversary some of the changes? Any color there would be helpful. Thank you.

Yes. I don't know that we published the coach number, but I will say a couple of things have happened, which were very healthy for the business. In fact, by splitting out the coaches, the definition of a coach, a person with intent to monetize their health and fitness versus a preferred customer, who's really buying into the concept of a discount on the product. So, we split that up so that we didn't have people in the coach network who didn't have any intention to be a coach. That has actually accelerated -- by having that designation, we've accelerated the number of preferred customers that came on. Likewise, the people who actually intend to be coaches, we can isolate them, train them appropriately and listen to them for what they're looking for. And that's the other dynamic. And I don't want to get ahead of myself in terms of what we're working on and excited about for 2023. But now, we've got this clear view of what the coaches need and what they're looking for to maximize this opportunity for them. I believe we're going to simplify the business in a way that will be -- that will help us achieve our mission of helping more people, get involved with this community of health and fitness and taking better care of yourself. So, stronger signal from the coaches, but at the same time, like I said, at the beginning, they're operating in the same consumer environment as all of us. And it's not a time that we can take for granted how easy it can be to generate a sale. So, that's why we're taking the view that we are.

Our next question comes from Joanna

Hello. Thank you for taking my questions. My first one is really trying to understand the Q3 guidance of the $150 million to $160 million on the revenue side. I think the midpoint implies a 25% down year over year growth. Just trying to really understand what component of that is driven by the macro headwind and what component of that is driven by the reduction on the sales and marketing spend? So, I've seen that your sales and marketing spend for Q2, is down quite a bit, as you mentioned quarter-over-quarter to $87 million. How much of that is the -- on the network payout, to your coach network? And what is your kind of plan for the sales and marketing spend for the second half of this year, and any thoughts on like balancing growth versus profitability? Thank you.

So, Joanna, I'm going to try to cover all this. There was -- there's a lot of questions, right? On the first one, look, Q2 over Q2 reduction was around 20%. So, taking a more prudent view on Q3 given the macro condition is why we said that guidance that way. And on the sales and marketing front, we're going to continue to be diligent, so that we get a quick ROI on those customer acquisitions. So, I would say the percentage of revenue that you saw in this last quarter is consistent with what you'll see going forward. And then, in terms of profitability versus revenue, what I would say, the investments we're doing are really more around things. We feel our platform needs and our offering needs. So, we position the Company to get back into growth next year. So, it's - and that's controlled investment is what I'll finish by saying, meaning, if ever we see, like, we need to slow it down, we could slow it down.

I think one of the dynamics that you're seeing here year-over-year is, third quarter of 2021, we were aggressively selling bikes and we were also investing in a significant media push, brand strategy and acquisition. And that's when sort of the reality of the environment was really becoming clear. So, what you're seeing now is a much more prudent approach and a reduction in chasing revenue rather than buying revenue. Now, we're really staying true to what built this company over the course of two decades. And that is investing in media and acquisition that we know is going to generate free cash flow. And that's been the fundamental of the business since we started it. And so, that's why we're taking this view of, if we're going to sell bikes, we're going to sell it into the database. We're very good at generating digital subscribers in a way that is at a good relationship of CAC to LTV. And we take advantage of the positive relationship we create with those subscribers and sell them a bike, and we don't have the same cost of acquisition. So, while that'll be a slower rate of bike sales this third quarter, as compared to last third quarter, the economics of those sales will be much more favorable. Does that help answer your question?

Yes. And then, you did mention for Q1, your sales marketing out of $106 million that was $70 million was related to the sales commissions to the coach network. How much of that is attributable to the $87 million for this quarter.

Joanna, we could dive deeper into that. Generally, we don't. What I would tell you is as a percentage of revenue, we've taken it from 62% to 48% selling and marketing together. And then sequentially from Q1, you did see a pretty nice reduction in overall spend by 19%. We don't usually disclose how much of it is coach compensation versus media acquisition.

Okay. That's fine. And then, My next question is on the mixed bike segment of the business. You mentioned in the last quarter earnings call that your focus is to increase the margin closer to the breakeven for the rest of the year. Do you feel that your plan is due on track to meeting the breakeven target by the year end or has that been pushed out? And what are your plans with the mixed spike business? If the margin doesn't really, or cannot get to close to break even, have you thought about potentially divesting that bike business?

Yes. Joanna, look, what I would say is first of all, in the gross margin, a substantial portion of the negative gross margin was related to non-cash reserves, $15 out of the $20 million. So, one, it makes it look a lot more negative than what it is. Number two, when we look at the holistic view of a bike customer, we don't look at it just as the upfront bike sale. We look at it more as the bike sale, plus the monthly subscription, and their retention and engagement tends to be higher, which is a positive in that LTV formula. And then, I think in terms of trying to make sure we're not participating in price wars to create more negative margin on that front, given the market situation, this is where -- the good thing about us is we could sell it to our existing customers, right? So, I think trying to push that way, reduces the customer acquisition cost, which has a positive impact on the gross margin.

Thank you for your question. There are no questions waiting at this time. So, I'll pass the conference back over to Carl Daikeler for closing remarks.

Okay. Well, I appreciate everybody. We ran a little bit over, but thanks everybody for joining us today, and thanks for your interest in The Beachbody Company. And we look forward to talking to you again next quarter. Thanks everybody.