BODI - NYSE

Good afternoon, ladies and gentlemen. Welcome to The Beachbody Company's Fourth Quarter and Full-Year 2022 Earnings Call. At this time, all participants are in 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 over the call over to your host Bruce Williams, Managing Director of ICR Investor Relations. Please go ahead.

Welcome everyone and thank you for joining us for our fourth quarter and full-year 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 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 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, Bruce, and good afternoon everyone. Okay, first, let's get caught up. On our last earnings call, we presented our expectations for the fourth quarter and our plan to continue bringing costs in line with the dynamic environment, all while we pursue our significant strategic innovation plans for 2023. I'm pleased to say we delivered fourth quarter revenue in line with our expectations and adjusted EBITDA that was well ahead of our guidance. 2022 was a demanding year, and I'm proud of what our team achieved despite the challenging economic backdrop and the headwinds faced by our industry. But we met or exceeded guidance in all four quarters of 2022, and we executed on our one brand strategy that we announced exactly a year ago during our 2021 Q4 earnings call. Actually, to put this all in perspective, let me step through the highlights of what we said we would do and the actions we executed in 2022. As you might remember, we made the decision to consolidate the business into one platform to focus capital allocation and centralize all our technology, marketing and content investment. In July, we initiated the migration of the openfit platform, content and subscribers into the Beachbody on-demand platform and began engineering the consolidation of the Beachbody on-demand subscription, together with our premium BODi subscription to create one simplified, but extremely compelling offer. I'm proud to report that work was completed on time and under budget just a couple of weeks ago. And we're now launching the world's first complete health esteem platform under the BODi brand. With the greatest digital fitness catalog in the business and its stream of compelling new content every month. A full nutrition section with two incredibly popular eating programs and over 1000 healthy recipes, plus a brand new positive mindset channel to help our subscribers feel great about themselves in all shapes and sizes. More on what all that means in a minute. But fundamental to all this activity was a thorough approach to taking costs out of the business and formulating a clear roadmap to profitability by focusing on our customers biggest problems and their wants and needs. We completed the process of aligning headcount, technology and production spend with the business plan and reduced our nutrition SKUs and key bundle configurations known as Total Solution Packs from a 190 variations down to five. Further simplifying and streamlining the business. In 2022, we improved EBITDA and CapEx by $125 million, that's ahead of the $110 million target we promised earlier in the year. We're confident that we're on the path to consistent adjusted EBITDA profitability by Q4 of 2023. And with our 2022 debt raise, we don't foresee any additional need for capital. The business implications of these changes are compelling. This consolidation simplified what our network of BODi partners offer. We used to call them Team Beachbody Coaches, now we call them partners. This consolidation drastically simplified the array of options BODi partners offer their prospects. So now the field can spend less time training their teams and focus more on helping people engage with the platform. That dramatically increases their income opportunity, which should in turn attract more people to sign up to be BODi partners. On the last call, we also introduced our plan to reposition our company and brand to fill a major void in the industry. We spent 2022 rethinking how to best serve the significant TAM of people who've been left behind by the legacy fitness and diet industry. We're doing what category leaders do. We're expanding the size of the addressable market. And to that end, we launched the Health Esteem category. Let me elaborate on this vision before I turn it over to Marc. So you have context of this expansion as you get into the specific KPIs from the quarter. I think you'll see we're extremely well positioned for growth. Because what we've learned, really since the pandemic, but especially last year, is that the majority of consumers are rejecting the premise of the Legacy Fitness and Nutrition business that runs a playbook convincing prospects that they aren't good enough until they lose the weight or get the six pack. In fact, we discovered this gap when we had two surprises last year. Of the programs we launched, two of them surpassed our expectations 4 Week Gut Protocol and Fire and Flow both which focus on how you feel, while you do the programs versus focusing on the results that you achieve at the end. It became clear to us that our transformation model of P90X and INSANITY could be significantly complemented by an ongoing plan that focuses on how people feel today so they stay engaged in the process and appreciate their sense of well-being along the way. This represents a significant business opportunity for us because the data is clear that the legacy industry is failing at this. Overall, happiness has declined over the last 49 years, while obesity rates and lifestyle diseases have increased. There are 150 million adults in the U.S. that are overweight or obese. That's 74% of adults, and that number is climbing. The legacy industry has concentrated its efforts on convincing prospects of their faults to motivate them to buy -- to buy that treadmill or join that gym. And it's primarily retraining the same cohort of people who move from one solution to the next, over and over, trying to find happiness. Once we saw this gap in the market, we were quick to organize and expand the platform to serve this new category of health esteem. This is what's been missing from the model, a comprehensive solution that fits with real life, that delivers happiness on day one, not just physical results at the end of a program. What most adults are looking for today is the support to reduce anxiety in their lives, to feel better, and to improve their self-esteem. People don't want to be deprived of the freedom of take days off from training or enjoy the food they love. Bread, for instance. Like, when did food become enemy number one? In fact, as we surfaced this new category, we discovered a bold way to help people get healthy, while they still enjoy the foods they love. We actually encourage people to eat more dessert, and that's a whole new category we're moving into with the existing products. Back in 1998, when we founded Beachbody, we defined the home fitness category with our content. Then we saw a dramatic period of growth when we created the category of Superfood Health Shakes, and we're now taking everything we learned from the last two decades and our observations since the pandemic and expanding the market by opening it to this holistic new category of health esteem. You'll see this materialize in five significant ways. First, as I said, we consolidated our subscription tiers of BOD and BODi into one simplified complete bundle, we call it BODi. For an annual subscription price of $179, or around $15 month for access to our library of 120 fitness programs, or over 8,500 on demand videos that services the business model we're best known for and which is the foundation of our revenue model. Second, we've launched an ongoing series of four new workout plans each month called BODi Blocks. These are new three week programs starting the first Monday of every month, serving beginners, general overall fitness, lifting and a specific plan each month for our connected bike subscribers. The BODi Block plans are the incremental layer to appeal to the audience that's not project oriented like our P90X customers for example, but just looking for a cost efficient and effective alternative to joining a gym or hiring a personal trainer with the flexibility to take time off during the month. Our partners use that monthly cadence of new BODi Blocks to start a new wave of subscribers every month, rather than only when a new program is launched, which was the trend of our old model. Third, we've added Positive Mindset Master classes to our platform, and it's a game changer for retention. This content makes BODi the only platform offering complete fitness, nutrition and mindset content in one subscription. These monthly Master classes help people manage their mindset so they overcome obstacles and reduce their anxiety while they work to achieve their overall lifestyle objectives. This month, for instance, we're introducing a Master class called Happiness Habits with bestselling author Petra Kolber. You see gyms or other fitness services just expect members to navigate life's ups and downs and stay consistent just figure it out which is unrealistic and obviously leads to higher churn. Our Mindset Master Classes give people the tools to start with a positive mindset that enhances their experience and improves their self-esteem, as we saw from those two Feel good launches last year, when people feel good physically and are feeling good about themselves, that content has incredibly high value to subscribers and they're less likely to churn. Okay. Fourth, we're also expanding the positioning of Shakeology to not only be the first Superfood Nutrition Shake, but also the world's first Superfood Dessert, a smart dessert, if you will, with hundreds of recipes that take advantage of the incredible flavor variety of the Shakeology product line. The product is delicious alternative to traditional desserts, and it has incredible health benefits. Healthy desserts fit perfectly into the health esteemed category and represent a massive new $48 billion market opportunity for BODi. There are tens of millions of people who may not be ready to start one of our fitness or eating plans, but who will absolutely take the logical first step of swapping their normal dessert choice for a Superfood Dessert that actually helps them lose weight and makes them feel great. And finally, all of this is driven by the powerful catalyst of changing the name of the platform from Beachbody to BODi demonstrating our commitment to our network who feel strongly that the Beachbody name was poorly aligned with our mission and holding them back from expanding their market. I can confidently add that our BODi partners are extremely enthusiastic about these initiatives, including the name change, the simplicity, the price points, and especially the addition of positive mindset content to the platform. They're engaged and have been promoting aggressively since the March 2 launch. There are also some other important operational improvements we look forward to in 2023, such as simplifying our digital experience by reducing clicks at checkout and adding alternative payment options later this year, such as PayPal and Apple Pay. These are all powerful changes that are enhancing the productivity of our proven business model, a model which has been consistently successful whenever we innovate our approach to fitness and nutrition based on our observations within our ecosystem. I'm extremely grateful to the teams who believe so passionately in this mission that they delivered on this initiative on an incredibly tight timeline and budget. But our mission is clear. And they're on board. We're determined to help as many people as possible to achieve their goals and lead healthy, fulfilling lives, generating long-term, sustainable, profitable growth and shareholder value. We know we're executing all this in an unpredictable environment, but that's exactly when there's the most room and demand for radical transformation and BODi is taking the lead. We never stand still. Now let me turn it over to our CFO, Marc Suidan with the details of the quarter and the full-year 2022 results. Mark?

Thanks, Carl, and good afternoon, everyone. We are pleased with our fourth quarter results, which came in at the high end of our expectations. Fourth quarter revenue exceeded the midpoint of our guidance. Adjusted EBITDA was $3.5 million, compared to a loss of $26.6 million in the prior-year period. Notably, our fourth quarter results are a substantial improvement towards attaining a goal of generating profitable adjusted EBITDA on a recurring quarterly basis by the end of 2023. The actions that we implemented in 2022, coupled with our new healthless team initiatives, set the stage for sustainable revenue growth. On our third quarter call, we discussed our strategic initiatives relating to pricing, nutrition and cost reduction. Let me give an update on these three initiatives. With regards to pricing, and building on what Carl just shared, we introduced the new BODi pricing in September 2022. We adjusted the BODi Premium app to $179 annually from $298 and as of this month, you can only subscribe or renew on the BODi Premium app. As a reminder, the majority of our existing subscribers are involved only the basic library of all our programs at $120. Since we launched the new BODi pricing in September, our BODi subscriber file size has been growing in a healthy way. So while our overall digital subscriber base in Q4 contracted BODi is growing, additionally, we are finding that BODi subscribers have a much higher nutritional attach rate. These measures validate our vision of creating a higher value customer that is more engaged across our entire platform, including fitness, nutrition and mindset. We expect that the customer lifetime value will be higher because first, we will generate a higher initial ARPU due to pricing. Second, we will experience lower churn given the higher engagement enabled by the new fitness and mindset programming. And third, we expect that BODi customers will have higher nutritional subscription attach rates. Moving to nutrition, we expect to realize margin benefits as we continue to shift our product mix to higher gross margin products and enhance inventory management. This leads to reduced excess write-offs and lowers working capital requirements. Our largest and most important nutrition strategic initiative is the extension of our high gross margin product Shakeology into a Superfood Healthy Dessert alternative. This product extension will increase Shakeology's proportion of our product mix and accelerate long-term nutrition revenue growth. To be clear, this is not a new product, meaning there are no additional product development costs. Simply put, this expands the existing TAM and it is complemented with hundreds of recipes on BODi to prepare Gourmet Superfood Desserts. We are still early in the process of monetizing this opportunity. We just started to train our network of partners and we will improve our online presence in terms of search engine optimization and media creative assets. As a first step, our website now positions it very well. When you enter our app, you see fitness, nutrition and mindset all at the top. This will generate more traffic towards those seeking nutrition engagement. As it relates to our cost structure, we are continuing to gain efficiencies through our simplification initiatives. We have right sized our cost structure to the current run rate size of the business. As a result, we have reduced our headcount by over 40% to 615 employees since January 2022. Let me walk through some of our key initiatives and where they stand. We have reduced our per episode cost of production by more than 50%. We completed the first phase of migrating our ERP servers to the cloud. Our SKU rationalization efforts are on track. Marketing continues to focus spend on variable commission partners or strict customer acquisition costs for quick payback, and we completed a restructuring this past January, resulting in a further reduction in force. We will continue to capture additional cost savings through disciplined cost management, best practices and process improvements. Our lower spend can also be evidenced by our year-over-year reduction in payables, accrued expenses and lower capital expenditures. In 2022, CapEx was $46 million versus $109 million in 2021, representing a 58% reduction. Our CapEx declined dramatically as we consolidated to one technology platform and one production library due to our simplification initiatives, we expect our CapEx will continue at the same level in 2023 as it did in 2022. Turning to our results for the fourth quarter, total revenue was $148 million, which was 2% higher than the midpoint of our guidance. Digital revenue was $69 million, down 16% versus last year. Digital subscriptions were $1.95 million at the end of the quarter declining 23% year-over-year. DAU/MAU was in line with prior-year levels at 29%, while retention improved year-over-year by 30 basis points to 96.8%. Nutrition revenue was $75 million, down 23% year-over-year. While we were disappointed with this contraction, the actions that we recently implemented, including our focus on Superfood Healthy Dessert, new packaging sizes and offering simplifications should improve our Nutritional business in 2023. Connected fitness revenue was $5 million, with approximately 3,700 bikes delivered. Our $50 a month bundle for the bike, and the BODi subscription continues to be our most popular bike skew. While it is a great connected fitness deal, we still need to create more awareness of this offering. Starting this month, as more users transition to the BODi app, those subscribers will view the bike workout options, making it easier to market this offering to them. Gross margin was 57% of revenue for the fourth quarter, compared to 45% last year. The gross margin improvement was largely driven by revenue mix, which shifted to less connected fitness revenue in 2022. Let me walk through the gross margin drivers by key product line. Digital gross margin was 77% for the quarter, compared to 84% in the prior year period. The decline was primarily related to a smaller subscriber file size. As we regain scale, the production costs will be spread over a larger revenue base, resulting in higher gross margin. Nutrition gross margin was 50% in the fourth quarter of both 2022 and 2021. We are aggressively managing inventory to forecast, which should reduce our exposure to excess write-offs in 2023. With the focus on Shakeology via healthy dessert and the Shake & Hustle Packaging, our nutrition gross margin should improve over time. The connected fitness gross margin continues to be negative with some one-time charges flowing through this fourth quarter. We are leveraging our bike studio bundle to drive bike sales without competing in price wars. This ensures that the LTV of the customer remains positive. Importantly, our data shows that bike customers are very engaged in workouts and have a much lower churn rate. Total Q4 operating expenses, excluding impairment charges was $114 million declining 32% year-over-year, reflecting our aggressive cost management and the 40% reduction in headcount from January 1, 2022 to now. Selling and marketing as a percentage of revenue decreased by 11 percentage points from 63% to 52% of revenue for the year. Our selling and marketing costs are primarily driven by partner commissions and bonuses, which are purely variable. They earn these funds based on transactions that they generate. As for our marketing spend on media, we continue to be very disciplined in managing customer acquisition cost, so it delivers a profitable LTV to CAC ratio. For Q4, we reduced G&A by 9% compared to last year as we continue to manage expenses tightly. Also in Q4, we reduced our technology spend by 42% compared to last year. You can see how our technology spend has been reduced significantly, while simultaneously delivering a transformational change in our platform. This has been enabled by focusing our tech spent on one platform. All this contributed to materially improved adjusted EBITDA of $3.5 million compared to a loss of $27 million in the fourth quarter of last year. Our new cost structure positions us to generate profitable adjusted EBITDA on a recurring basis before the end of the year. Our Q4 adjusted EBITDA was positive, as we intentionally settle our executive annual performance bonuses in equity. We want our executives to be aligned with our focus on profitable growth. Excluding this equity comp addback, adjusted EBITDA would have been a loss of $2 million, which would have exceeded our guidance range of a loss of minus $9 million to minus $14 million and representing a 93% improvement over the prior year quarter. With respect to the balance sheet, we ended the quarter with an unrestricted cash balance of $80 million and $41 million of net debt. As previously mentioned, we do not see the need to raise additional capital. The existing debt arrangement has an additional facility of $25 million, which we do not plan on utilizing. Operating cash flow improved by $168 million year-over-year to negative $47 million, representing a 78% improvement. Fixed asset CapEx for 2022 was $26 million, compared to $78 million in the prior year, representing a 66% improvement. Net inventory decreased by 20% to $54 million from the prior quarter and has declined by more than 59% since the fourth quarter of 2021. Our discipline of aligning our nutritional demand forecast with our supply side purchases resulted in both a lower inventory level and less exposure to excess write-offs. Also our SKU rationalization reduced in stock levels of slow turning items. On the bike front, our new bundle strategy has allowed the company to improve inventory turns, gain very attractive long-term customers, and accelerate our cash conversion as we work through existing inventory. Now I'd like to take a moment to discuss our outlook for fiscal 2023 end of first quarter. With regards to revenue, we are guiding Q1 revenues to be in the range of $135 million to $140 million. The first quarter is typically our seasonally strongest period. However, Q1 revenues for 2023 will not follow our normal cadence given that we just launched our new strategy and offering. We expect to generate sequential revenue growth throughout the year as our initiatives gain traction. With regard to adjusted EBITDA, we're guiding to a loss of $3 million to $6 million for the first quarter. We expect adjusted EBITDA to gradually build throughout the year, as we begin to fully leverage our cost savings midyear and see sequential revenue growth. We will incur lower overall cost and gain efficiencies under our new simplified One Brand operating model. We remain on track to generate recurring and sustainable positive adjusted EBITDA on a quarterly basis by the end of FY '23. Next, I will provide color relating to our digital subscriber base. As a reminder, the majority of our customers are subscribed to the basic BOD platform at $120, and those customers will transition to our $179 BODi platform as their subscription comes up for renewal. The new BODi customers will get significantly more value, and we have received no pushback from our partner network. Since adjusting the price in September and before launching our revamped BODi platform, the subscriber file size grew and retention improved. However, our internal forecast has prudently factored a higher level of churn from BOD to BODi due to the price increase. Although we expect subscription declines for the year, I cannot stress enough that we are focused on attracting higher value customers with a higher ARPU and believe that our Health Esteem platform on BODi will drive stronger consumer engagement and improve customer retention over time. We will continue to manage the business for existing capital and do not see a need for a capital raise. To conclude, I would like to reemphasize the following. We have dramatically simplified the business and are delivering on our One Brand strategy, resulting in significant cost reductions in a clear path to sustainable profitability in 2023. We just deployed our new Health Esteem platform, creating the only holistic Fitness, Nutrition and Mindset platform. We are excited by the preliminary results, and this is the foundation to bring us back to revenue growth. With that, operator please open it up for questions.

Thank you. [Operator Instructions]. Our first question is from the line of Joanna

Hey, thanks for taking my question. Thank you so much for the overview on the rebranding, and congrats on that. My question is just to help everybody to flesh it out a little bit more. Just trying to understand what percentage of today's digital subscribers are actually on BODi already. And also, as you foresee people either renew the subscription onto BODi from the status quo or prior program, how do you foresee the ASP will play out for digital subscribers, but also on nutrition subscription as well as connected fitness, because I understand that you're trying to integrate all three components into one so that people can get access to nutrition through your Superworld dessert, but also the bike as well? So just trying to really better understand how that really will impact the driver from revenue side, if that makes sense? And then I have a follow-up.

Great, hi, Joanna. This is Marc. Thanks for the question. What I would say is the BODi subscriber file size, if you recall, this started in the Fall of '21 is when we launched it, and it's basically our library. And at that time, we had the live streaming. Right now, there's 8,500 live streaming workouts plus the 120 programs. And with what we just launched last week, we now also have the BODi Block, the new fitness programming, plus the Mindset programming, and the revamp on nutrition. So going back to September, that's when we adjusted the price down for BODi from $298 to $179. And that's when the file size frankly started growing in a very healthy way. So the reaction has been very positive. We're pretty happy with the way it's growing. So even though I would say the majority of our customers today are still on BOD, BODi has grown in a very healthy way, and we're pretty happy with how it's tracking. And the ASP. As you ask, the average, let's assume the ARPU or that metric at a minimum annually would be $179. Some people may be signing up to quarterly, which is $99, right. So it only makes the ARPU higher in a smaller period. Retention has been tracking better as well as well as engagement. All the good signs we want to see for a new offering like that. And finally, what I would say is not only are they more engaged, more likely to renew, but we're also seeing a higher attach rate of subscription. So our vision of deploying, of attracting customers that are higher value in net seems to be really working out well with all the pilots we did and since launching on March 6.

Okay, got it. Thank you. And is there a way to help us understand the renewal rate from the existing subscribers and switching to BODi, if you can help us to think through that, that would be helpful. And then my other question is really on margin. I know that you presented a few weeks ago and you provided the margin on three different segments, Digital as well as Nutrition and Connected Fitness. Digital, I recall you mentioned it's towards 80%. Nutrition is hopefully getting back to the 60% and Connected Fitness close to breakeven. Can you help us to understand in terms of the timeline, what is sort of realistic or likely timeline for you to achieve these targets by, so will help us to model that? Thank you.

Yes, Joanna, let me start off with you asked about the renewal rate. So when we first increased BOD in last July from $99 to $120, it was an experiment to see how would the renewal rate be impacted. We didn't see much of a negative impact, but it was pretty good. Now we're obviously monitoring very closely BOD to BODi, now superficially this may seem like a pretty big price increase, but I'll just say the biggest starts are actually people who sign up to what we call a total solution pack. And the average total solution pack before, which is basically the combination of digital and nutrition subscription was $180, and now it's $220, right. So I would say we haven't seen any pushback at all on the price. Now, to be more prudent, that's why we're not giving full-year guidance, because there's a lot of change we've deployed. To be more prudent in our internal forecast, we factored in a lower renewal rate but in general, I would say the jump is not as big on everybody as it may seem from the get go. And then you asked about the margin across our three areas. So we're not giving specifics there. But here's what I would say. Digital right now is in the high 70s. We brought down our per episode cost by 50%. So I really think at this point, it's a question of scale. So as soon as it starts picking up in size, and I'm talking more on the revenue size, you'd be amortizing the production cost over a bigger base, and that should bring back the digital margin into the low to mid-80s. On the Nutrition side, look, it used to be at one point, mid-60s, it went down to low-50s. Right now, it's around mid-50s. Our aim is to slowly work its way back up. As you know, we've done a lot of things to improve our supply chain, like closing West Coast warehouse. We're aggressively managing inventory. As you can tell, it's down by more than half for the year. But most importantly, the product mix by pushing more Shakeology and reducing low margin products, that'll be the biggest beneficiary to that nutrition margin to get it closer to 60%. And then look on the Bikes, as you know, the bikes is the game [Indiscernible] lifetime value of that customer. So we're not going to aim to be profitable from the first sale on the bike. Our aim is to attract customers at a point where we're not losing too much money up front by gaining a customer. And our data shows that they're the most committed customer in terms of workouts and renewals so that the lifetime value of that relationship is healthy and positive.

Got it. Okay, that's super helpful. My last question is just to clarify for anybody who get on this new brand of BODi, is it optional to do the Nutrition/superworld dessert? And also, is it optional to get on the bike or all of that is a part of sort of your program that people get on the BODi will have access to all, so which means that we'll see an uplift on Nutrition subscription as well as the connected fitness units delivered.

Certainly, that's the expectation. There's a few levers there. This is Carl, by the way. Good to hear from you again. First off, you're right. We've consolidated fitness, the eating plans and the positive mindset content into this one subscription, which comes down to about $15 a month. And you can imagine based on the number of apps out there, you'd have to have three or four apps to equate to what we're putting into this one synthesized offering. But what's beautiful about this is, for the first time now, the bulk of our subscribers have visibility to the biking content. They couldn't see it before because it was locked behind a different paywall. So now, again, the important strategy about connected fitness was selling it into the database. So now that they've got visibility into their favorite super trainers doing these rides, we expect and have seen that demand for this new offering that Marc described, it will be incremental. And likewise, same thing with this concept of eat more dessert. That is Superfood Dessert. As an additional application to Shakeology will give people within our own database who are not currently subscribed to Shakeology. An additional reason to do it, if you're going to have a bowl of ice cream, you might as well have a bowl of Shakeology Nice Cream at a third of the calories, higher protein, superfoods, fibers, all that good stuff for you and improve how you feel about your life. So all of these things are incremental. And our focus is how do we attract more of what we call super consumers who are inclined to buy -- to spend more in the ecosystem as they're having a better experience. But at the same time, we do expect there will be some people who just come in for the fitness, who just come in for the eating plans, who just come in for the superfood dessert, or they just want to ride the bike and do our great rides. So the Ala carte menu is available as well as the Everything Under the Sun menu.

Got it. That's super helpful. It just basically helps to facilitate your upsell or cross sell the programs. But it is an optional. Okay, very good. Thank you so much. Super helpful.

Thank you.

Thank you. [Operator Instructions]. The next question comes from the line of Kaumil Gajrawala with Credit Suisse. Please go ahead.

Hey, guys. I guess good afternoon for you guys. Good evening for me. A couple of questions, maybe starting with the balance between a big new launch and controlling costs. And I guess I want to ask that in the context of EBITDA profitability this quarter great. But the guide for first quarter is for a bit of a loss. So can you maybe just walk me through first that balance between launching something new and managing costs? And then layering on is the highest amount of launch costs in 1Q and that should sort of fade as we go through the year or my thinking -- am I thinking about it wrong?

Well, frankly, the launch costs are covered in the daily operating business. The cost to build this and prepare it really happened in 2022. We just launched it on March 2. So now it's running the business, running it efficiently and acquiring customers efficiently into a strong LTV. So we don't have the kind of launch costs like we're putting out a movie. This isn't a hits business. This is a business model that we've seen very strong proof of concept, really, when we started testing it back in March, then again in June, another test in September and again in November that we've seen incremental benefits from this that led to the configuration, pricing and launch structure that we've had today. So I don't think there's going to be necessarily a change without giving guidance to quarters ahead. I don't think there's going to be a dramatic change. It's not like we were digesting a big CapEx or launch budget in Q1.

Yes, and…

Okay. Sorry go ahead, Marc.

Yes, what I'll add is that simplification of consolidating all our platforms has delivered incredible results for us, right? So we've been able to revamp and relaunch and transform ourselves, while dramatically cutting down costs. And that's all enabled by having one technology spend, one marketing budget, one production library. So this massive cost reduction was all done in a way where we're able to actually deliver more, not less, right, which should be very beneficial. So our current cost structure is totally set up for this current run rate of the business. And then from here, by deploying all these changes, all the growth starts delivering the profits thereafter.

Okay, great. And I guess as a follow-up on that, are the costs now where they should be? Obviously, everything you just talked about on bringing down various technology spends, bringing down G&A, are we -- is this now the run rate or is there still more to go? And maybe just to make sure that it's clear, I think of the difference between cost cutting and efficiency. I recognize you'll continue to focus on being efficient, but that some of the big heavy lifting. Would you say that's complete now after '22 and we get on with it? Is there still more to do?

Yes, I would say it's largely complete, right. There's still a few things to flow through to get the benefits. I mean, the last reduction in force we did was in January. But for the most part, we're pretty close to realizing the benefits of all the cutting we've done and driving the efficiency we want. And you could see from our CapEx spend in '22 versus '23 that's more likely to be the profile of our CapEx spend going forward. We had some one-time cost in Q1 to incur due to the reduction enforce and the severance. But once we started exiting that, I'd say we've pretty much set up the business to be able to run at this size. And then all the changes we're making is all about driving new growth, and thus the leverage model will create the profitability from there.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Jonathan Komp with Baird. Please go ahead.

Yes, hi, good afternoon. Thank you. First question I want to ask if you could be a little more specific. What's the year end cash balance that you're targeting, and could you share a bit more insight just to the key performance metrics that you're including to forecast that?

Yes, Jon, this is Marc. What I would say is, like I just said in that previous question, we have a bit more cost to incur in this quarter for one-time costs. And then afterwards, largely at this size, we've set up the business not to burn more cash. So our plans is we're trying to drive this in a way where we avoid going below our net debt balance and start generating positive cash flow from there. I think the most critical thing to watch out for in terms of KPI, given all the changes we've done is going to be the digital revenue, right? Because we're shifting to this higher value customer that line will be critical to see if we're netting out. And our plan is to net out more favorably on the revenue side, despite having a bit less subscribers.

Okay, and I guess I'm trying to understand more of the revenue assumptions you're making, given the very significant changes to the business model here. And if you could share a little bit more insight on the last comment you just had, effectively raising the price of your core product by 50%, how you expect the subscriber base to play out, and if you have any specific test data to base that on?

Yes, we have plenty of test data, Jon. What I'd start off by saying that's why we did the July price increase on BOD to test that out. And then when we brought the -- in September, the price of BODi from 298 to 179, the reaction was very positive. We've surveyed our coaches and partner network extensively. They're incredibly supportive and mainly because remember, that's what I was saying earlier. When they bring in customers, they mainly start them off on what we call a total solution pack, which is both a digital and nutrition subscription. On average, that's going up by $40, right? It's going up from an average of $180 to $220. And then it goes to the normal nutrition subscription. So all in, we don't think it's that big on most of our customers. It's still considered great value for everything they're getting. Because when you take the 179, and that's like $15 a month. So from all the research and pilots we've done, we haven't seen anything that worries us the other way around. We're seeing a lot more positive because those people are more engaged. Retention is looking healthier for the BODi cohort. The nutrition subscription attach rates looking healthier. So everything we had in our vision, we're seeing play out through all the pilots and tests we've done in since our launch.

Okay. Two more questions for me. Just as you think about the timeline for renewal, the 2 million digital subscribers that you ended with. Could you just share more insight? What time of year you expect the majority of those to renew, and how will you -- at what point will you know the success rate of your switch, and how would you react if the results are any different than you're expecting?

Yes, so the majority are on an annual subscription, which means they flow monthly through March of '24. There's a bit of skewing towards the first six months, because some are monthly, some are quarterly, some on a six month plan, but the majority are an annual. So I say a bit skewed through the first six months. But overall, we'll see that 112 come through every month, all the way through March 2024.

One of the things I'll say, Jon is -- Johnathan, is that the $179 does give us an advantage that we didn't have at the lower price point. And that is -- and we're in the middle of -- in the midst of testing customer acquisition now through our direct channels. We run that very cautiously because we're sensitive to the cash flow implications of "Buying Subscribers" that have too long of a payback. But the $179 gives us much more room to buy a customer and get return of capital within year. So we've got room to run a higher LTV or a higher LTV per start on those new digital subscribers. And if anything goes sideways on us, we've been very conservative with the way we forecast the renewal rate. But if anything goes sideways on us, we have extra room in acquisition and intend to frankly, this is where growth can come from, that we take that extra room in the margin, in the margin of the $179 versus the $119 for customer acquisition. So we can shift our emphasis over on acquisition from renewal if anything goes sideways. But again, you balance all these factors, right, because the thing we promise the market -- me the way I like to run the business is, I like to run it free cash flow positive. So our -- the first thing we need to assure for is that we're running in a positive EBITDA as soon as possible. Then we start to make sure we're investing in growth, but not the other way around. So we're balancing these things and we're doing it in a conservative rational way, given some of the other uncertain macro factors at play.

Understood. Just last one for me on the Connected Fitness business, it's obviously a drag on the income statement currently, so could you just share more specifics on the LTV that you see for that customer? And how do we know that it's not a broader distraction on the business, just given the size where it's at today? Thanks for taking all the questions.

Yes, Jon, thank you. Look on the Connected Fitness one, with this new bundle we've launched, it's $1,800 upfront, financed through a Buy Now Pay Later firm called The Firm. And so we get the majority of the money upfront. So cash flow wise, it's actually very beneficial. Honestly, I think it's the best deal out there you could get for Connected Bike. It does not take a lot of our attention at all. And then really, I think now that we've launched this new BODi platform and there's so much more subscribers on BODi, they'll start seeing the bike workouts, right. But they just won't be able to use it. It makes it a lot easier for us to market this to our database, so we could drive more demand.

Yes, the one thing I'll say, Jon, is that I'm very excited by this, you know this company like, we continue to innovate and test and learn, test and learn. That's what we did with to make P90X a success and INSANITY a success and Shakeology a success. And having that lever of the Connected Fitness, it's such a good customer and this rich the volume of people in our database now that they'll all have visibility to our biking content that just started on March 2. So I'm actually very excited by the prospect of the Connected Fitness business, but we're not doing it at a way that drags the business to your point. It's not a distraction, it's just an area of creativity where now we get to bring our best skills to the table and that is creating content and use cases so the people who get on that bike are going to be getting results and having a great time as they do it. And I will say, when this thing launched March 2 and people actually was the Monday the 6th that they really started to use this new content. We absolutely saw a jump, a significant jump in engagement on both the BODi platform and on the bike. So engagement is good proof of demand. So I feel like we're in a very good position. And as Marc said, the consolidation of the business and the subscriptions just made this a much more efficient business model that now our network of partners we used to call them coaches, our partners have the ability to stay focused and they're not changing gears every three months. And they've got a simplified view of how a person comes in. We're helping them. How can you make $200 a month? How simple can that be? So, like we like to say here, simplicity is velocity. And I think that's what we've just achieved here with the launch of March.

Okay. Thank you.

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim. Please go ahead.

Hey, Carl. I wanted to start with when you think about getting the word out right on the new brand positioning, so what is the plan on that? And then to the extent that the partners are going to do a lot of heavy lifting on that, is there a prioritization right, that in the first, I don't know, six months, we want them to focus more on the conversion right. And educating the existing base as opposed to prospecting or not, right. You do both at the same time.

That's exactly right. Our focus is with our best customers, the current cohorts, and that's where we leverage our social media following that between corporate and our ambassadors, we got 20 million people following us, including our current subscribers. So our job is to make sure that we are surfacing the concepts, the value, the positive mindset content, the two eating plans, and all of this content, four new plans that drop every month to all of these subscribers to maximize renewal and to maximize engagement and obviously, hopefully results for those customers. Then that creates a referral engine. And that's where our partners are so powerful so now that we don't have to train them on a new program every other month. But we've got this same, what we call the BODi Block construct that they get to market month after month after month with a new wave of plans dropping the first Monday of every month. But it's the same construct, we will create velocity. So you got these two layers, right. First, priority, maximize sell through into the current subscriber base so that they understand the value that they're getting. And second, leverage the great experience. And referrals through the partner network for incremental subscriber adds at a guaranteed payout. And that's the business model that we've been running, really for the last 15 years. But now it's more simplified so that the partners can be more efficient.

Yes, and John, this is Marc. Let me just add to that. On the rebranding part, when we add up our social media followers or super trainers followers, our key coaches, it goes to well over 20 million. And then our e-mail database is over 10 million. So our ability to inform people and turn it into an opportunity to tell them who we are now and where we're going is not something that requires marketing spend. We're able to do it via our existing mechanisms of budgets.

All right, then my follow-up would be you talked about the nutrition attachment rate. I think in the past that was, I don't know maybe in the mid-teens or something like that. Where do you think that goes to? And then what happens to the -- and I know there's a bundle here, so maybe it's hard to parse out a nutrition ARPU, right. But I think the nutrition ARPU right in the past was quite high. Does the attachment rate go up and the ARPU go down a fair bit, or no?

Yes, John, look, you're right. Historically, it was in the very high teens. Right now, it's I mean, if you just take the numbers, it's around that 10% mark. We got to bring it back to where it was and everything we're seeing like I said earlier, the BODi file size is growing well, and the nutrition attach rate is where we want it to be, and I say that in a favorable way. And on the ARPU for nutrition, it is around, I want to say $100 to $110 a month on average for a subscription. And two-thirds of that business is subscription. One third is one-offs that through CRM and other campaigns we do or other products they want.

Yes, and John, I will add, if I can add that our CRM activities are literally of my role, my top four priorities, CRM of selling nutritionals, and particularly this idea of expanding Shakeology into the healthy dessert category is one of my top four priorities. Another one of my top priorities is to maximize sell through of our number one supplement, and that is our pre-workout Energize, which I happen to have twice a day. It's my morning coffee, and it's my afternoon pick me up. And we're seeing that through the really, that gets traction through the entire database. We've got consultants who have been helping us install what we call CRM sequences that once you install them and you understand what a five or six e-mail sequence what that productivity and return on that sequence can be, you install it and let it run. So somebody cancels or somebody lapse or pauses or changes flavor like we've got a sequence that runs, it communicates with those people in a way that now becomes predictable, additional revenue retention or additional LTV. So this is a priority. And we traditionally see a decline in the nutrition files just from Q3 to Q4, the fact of the simplification of the business, like I said in my opening remarks, we've moved it from 190 different configurations that our prospects had to wait through to five. And we've also added a new SKU, which is 20 servings of Shakeology and 20 servings of Energize. This is being used in a couple of ways. One, it's a holistic product for people so they can get both of these things and not have pantry loading, meaning they're not going to be at the end of the month, still haven't burned through their product. So the next shipment is layering on top of that. Now with just 20 servings. It's appropriate to their consumption, but also it's a sampling opportunity. And we're seeing people who are taking what we call the Shake & Hustle pack of these two products are then making a decision do they like that configuration or do they want to pick one or the other rather than cancel the one thing that they got. So these are all of the levers that we've been experimenting with in the back half of the year and going into the first quarter that give us a great deal of confidence that not only is the business model healthy, but we're making improvements to increase attach rate, which increases LTV.

That concludes the question-and-answer session. I would now like to pass the conference back to Carl Daikeler for any closing remarks.

All right, thanks so much, and I appreciate everybody jumping on. I know we went over a little bit here, but at the end of the day, the most exciting thing to take away from this call, which I hope our stakeholders see is that the hard part is behind us. The cost profile has been addressed. We've added this compelling layer of content and positioning to add appeal to like it's an entirely accretive market that the Fitness and Nutrition business hasn't been speaking to and that the people are doing nothing. The category of health esteem is creating net new demand in a market where the majority of the population is still looking for the resource to help them look and feel good without having to give up the lifestyle that they love to live. So we're very excited, excited by what 2023 has in store for us. And we're going to execute the way you've seen us execute for 24 years. So I appreciate everybody's support to build the greatest resource for a healthy, active lifestyle in the world. This is no small undertaking, but the ultimate outcome is going to be a powerful company and business and very rewarding for everybody involved. Thank you, everybody.