BODI - NYSE

Good afternoon, ladies and gentlemen. And welcome to The Beachbody Company Second Quarter Earnings Call. Currently, all participants are in listen mode only. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time at the start the queue up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I would now turn the call over to Bruce Williams, Managing Director of ICR Investor Relations.

Welcome, everyone, and thank you for joining us for our second quarter earnings call. With me on the call today are Carl Daikeler, Co-Founder and Chief Executive Officer of The Beachbody Company; Mark Goldston, Executive Chairman; and Marc Suidan, Chief Financial Officer. Following the prepared remarks, we will 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 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.

Hello and good afternoon. Thank you for joining us today. On our last call, we announced several changes taking place at BODi and most recently announced that Mark Goldston joined the team as Executive Chairman. Mark is the seasoned consumer products, fitness and Internet leader with valuable experience having run public companies for decades. This addition signals an exciting time for the company and for me to personally have the opportunity to work beside an executive of Mark’s experience, particularly as we’re all eager to achieve a turnaround in our profitability and the performance of our stock. When our Board member, Kevin Mayer, introduced me to Mark, we discovered that we shared a common vision on how to drive long-term growth for BODi. And I can see that his experience running public companies would add incredible value to the management team. I want to take this opportunity to let Mark share his perspective on his first 50 days with BODi. But let me reiterate a few key things about Mark’s arrangement with the company first. As the Executive Chairman, Mark is a Board member and has an executive officer role actively participating in the management and decision-making processes of the company with a focus on the more transformational initiatives. Driven by his belief in the underlying value of BODi, he chose to take all of his compensation in equity stock options, the majority of which best based on stock performance. And this transaction was so important to my determination to turn around the company and my enthusiasm for partnering with an executive who has done this kind of turnaround many times before. I forfeited 8 million common shares that I personally own to minimize dilution of Mark’s equity grant to the rest of the shareholders. Building on Mark’s deep digital and consumer experience, his role is to help us turn cash flow positive as soon as possible. Mark and I are working closely together along with other senior executives and the benefits are already materializing. Now let me turn it over to Mark to share his perspective, which I think can be insightful to our shareholders and investors. Mark?

Thank you very much, Carl, and I really appreciate the warm welcome to the BODi team. I’m so delighted to be part of this exciting story and use my broad range of experience to contribute to the success of the company. Carl and I started talking back in mid-May and I’ve had a considerable amount of time with him, the Board and the executive team in that time. I’ve been very impressed by Carl and the team he’s assembled and have really enjoyed working closely with them in the past two months. I’ve run many public companies dating back to 1991 and my expertise has been focused on corporate turnarounds, unlocking their intrinsic value, while re-architecting their infrastructure to drive increases in revenue and profitability. I actually wrote a book called The Turnaround Prescription many years ago, which focused on repositioning and restructuring companies. Many people have asked why I would agree to join BODi at this time. And my answer was that I truly could not believe the BODi was trading at $0.44 a share with a market cap of roughly $150 million, given what I learned about the company. I believe this company has incredibly valuable assets to work with as it has arguably got the finest, broadest and most comprehensive digital fitness library in the world. It’s got an extremely valuable lineup of nutritional products and a great team of people. Not only does the company have tremendous brand equity with this powerful stable of digital and nutritional products, but it also is a very valuable customer database, containing more than 14 million former customers, some of whom can be activated easily and very profitably with aggressive win-back programs to grow the business. If you consider the company’s historical CAC or customer acquisition cost, this existing BODi customer e-mail database in excess of 14 million people, most of which are former customers, has generated billions of dollars of historical revenue and was the principal driver behind BODi being a very profitable company for 21 years of its 24 years of existence. If a competitive fitness and nutrition company, we do attempt to amass the database, similar to the 14 million people on the BODi database, given the current customer acquisition cost in this industry, it would cost literally billions of dollars and take many years to reach the size database that BODi has today. For those reasons, I strongly believe in the intrinsic value of this company just on the component parts basis alone, is vastly greater than where the stock trades today. That’s the major reason I decided to take 100% of my comp in stock options. I received no cash, because I want to be totally aligned with all of you, the shareholders, as we navigate this journey together. We spent virtually every day since I joined the company almost two months ago, building the turnaround plan. We’ve been prioritizing revenue-generating initiatives. We’ve created a lever analysis, which identified additional cash generation moves, if needed, and setting the stage from monetizing these incredible digital, nutritional and database assets to turn this company profitable. With that, our goal is to prioritize profitable revenue, not growth at all costs. As one of the largest digital fitness companies today, scale is not the primary issue for this company. What we need to develop are higher quality revenue streams that generate healthy contribution margins to increase the bottom line. Our primary focus will be on cash flow generation and creating incremental revenue opportunities, which focus on their ability to instantly generate cash and flow through profitability. We’ve constructed a powerful turnaround plan for the company, and we will be vigilant in our focus and execution as we move our way through the priority list to help transform BODi into a very profitable, cash-rich company. The next few months will be a period of positive and deliberate transformation. So I’m going to ask that you please be patient with us as we tap into new revenue streams, new audiences and new marketing tactics that the company has not previously utilized. I feel great about the prospects for a successful turnaround at BODi and I’m looking forward to profitable growth ahead. With that, let me turn the call back over to you, Carl.

Thanks, Mark. I totally agree. Let’s continue now with a high level overview of our second quarter results and operational highlights. Then Marc Suidan, our Chief Financial Officer, will provide additional detail on Q2 financial results and guidance for Q3. For the second quarter, our revenues and EBITDA were within our guidance range and I want to thank our team for the continued hard work in driving our transformation. While our overall digital subscriber count decreased by 12% to $1.53 million in Q2 from Q1 of 2023, our new digital premium subscription BODi grew subscribers by 77% to $711,000 in Q2 over Q1. Now let me briefly talk about our transformation. Last year, we set a plan with three major components; simplifying our platforms into one complete digital solution, including fitness, nutrition and personal development; invigorating our sales and marketing for new customer acquisition; and adjusting our cost structure. As we discussed on our last earnings call, our new consolidated digital subscription product, what we call, that’s BODi was launched on schedule and under budget and is exceeding expectations as demonstrated by our second quarter customer renewals. Our existing customers largely the basic Beachbody on-demand customers have continued to renew at approximately 60% into this BODi premium subscription with an annual price of $179, compared to the prior $99 subscription. This renewal rate continues to beat our expectations, which tells us that customers are responding well to our new formats and monthly BODi block programming. In addition, we saw an uptake in nutrition retention for the first half of the year, driven by our new content-based retention tactics. While we’re pleased by the increased nutrition retention, we also still have a significant opportunity to increase the penetration of nutrition into our existing digital subscriber base and that remains a priority. We are aggressively working on strategies to increase that take rate. While we’re confident in our strategic product direction, we’ve also been keenly focused on sales and marketing strategies to optimize our opportunities. Let me take you through some of our strategic initiatives that we discussed on our last earnings call and then I’ll talk about some new strategies. First, our coach and partner network activation. During the quarter, we had our Partner Leadership Summit, which was attended by about 12,000 coaches and partners. We held this event to train our partners on our new BODi premium solution, our new bundles and to reinforce the breakthrough of the health esteem category. We also deployed a new sales incentive in Q2, and in July, we launched a new tool to help partners and leaders develop a sales action plan to teach them how to collaborate this teams. In September, our top leaders will hold in-person leadership academies in various key markets to continue training new sales leaders. As you can see, we’re intensely focused on training and activating our coach and partner network. And second, on our customer database reactivation initiative, we’ve spoken on the last couple of calls about reactivating our large churn database. Now with the right team in place, we successfully kicked off several aggressive win-back marketing campaigns at the end of July and the campaigns are showing us which offers are the most effective in converting past churn customers into current paying subscribers. We’re leaning into this strategy at scale in the third quarter and fourth quarter. Third, on performance marketing. Our enhancements in Q2 resulted in greater digital subscriber starts over Q1 and at the higher price of the BODi premium tier. In fact, our conversion ratio of visitors to subscribers increased by 27% in Q2 over Q1, driven by improvements in audience targeting, messaging and digital landing pages. We continue to monitor and manage the order funnel very closely to ensure our conversion continues to improve. We’re also piloting additional new strategies, including scaling on Amazon and launching a new free preview tier late in the third quarter. With regard to Amazon, we plan to expand our nutrition portfolio there. In Q4 of 2023, our plan is to launch and start actively marketing across a broader set of categories. While we currently have a small variety of products on Amazon, we haven’t been prioritizing the channel. And our latest tests indicate this is a large growth opportunity without undermining our other sales channels. So we’re in the process of selecting an experienced partner with best-in-class capabilities that will help us drive growth on Amazon with proven best practices. Next, we’re creating a free preview layer of digital content for prospects to engage with our extensive library of samples of our most popular content, while visitors consider subscribing. This will enable our database activation team to convert visitors to paying digital and supplement subscribers with sophisticated conversion funnels. As Mark said, these initiatives have already been defined, prioritized and just launched in the last couple of weeks, and they’ll be expanded over the coming quarters. We’ll provide updates on shifting our revenues to higher contribution margin revenue, while we continue to manage our cost structure as we navigate this turnaround. I echo Mark’s comments, but it will take time to see all our initiatives through, but we’re making significant progress in this transformation. And with that, I’ll turn it over to CFO, Marc Suidan, who will walk through the results for the quarter in more detail. Marc?

Thank you, Carl, and good afternoon, everybody. We met our guidance on revenue, EBITDA and cash flows in the second quarter. This is the seventh consecutive quarter that we have achieved or exceeded our guidance. I will discuss our results for the second quarter, our KPIs and guidance for the third quarter. We recently announced that we amended our Blue Torch Capital Financing Agreement. We worked with Blue Torch to agree on covenants that are more aligned to our business strategy. We shared with them our plan to transition the company to more profitable revenues, thereby accelerating our process of becoming cash flow positive. Blue Torch supports our approach and agreed to lower revenue covenants associated with our credit agreement, providing us with the flexibility to implement our turnaround plan. Given our path to positive cash flow and higher margin revenues, we agreed to pay down $15 million of the debt, which will lower our annualized interest expense and reduced our outstanding debt principal to approximately $35 million. The net result is a positive development as the amendments align with our strategy of building a profitable and sustainable business focus on cash generation. Moving on to the results of the second quarter. Let me start with revenues. Revenues were $134.9 million, which was above the midpoint of guidance and 7% below the prior quarter. This is consistent with seasonality of the fitness industry. I will now elaborate on each of our three product lines. Given all the changes in the past year, I will focus my comments on sequential revenue performance. Digital revenue was $65.2 million, up from $64.8 million in Q1. Our overall digital subscriber count is $1.53 million, down 12% from $1.75 million in the first quarter. However, our BODi subscriber file size, which is our premium platform and the only one you could describe to now increased by 77% from the prior quarter to 711,000. There were questions in our previous earnings call about the customer propensity to renew from $99 to $179. I am happy that we exceed our expectations and customers are renewing at 60%. We are moving to higher value customers that will drive more profitable revenues. This is reflected in both our digital LTV, which increased in Q2 over Q1, and in our deferred revenues, which increased over the past two quarters. We are looking to reactivate a large number of class customers. Those reactivations have minimal customer acquisition costs and will result in very healthy cash contribution margins. Nutrition revenue was $64.6 million, down 13% from $74.1 million in the prior quarter. Our Nutrition subscriber file size is $195,000, down 6% from $209,000 in the prior quarter. The Nutrition revenue decrease was more pronounced than the subscriber count decrease, because we sold more digital and nutrition bundles, which results in higher allocations of revenue to digital. Additionally, we are launching in Q3 a new monthly digital and nutrition bundle at a competitive introductory price. For consumers impacted by the macro inflationary environment, this will reduce the entry point without sacrificing profitability. Connected Fitness revenue was $5.1 million, down 15% from $6 million in Q1. We delivered 5,500 bikes versus 4,700 bikes in Q1, a 17% increase. The increase in units delivered and the lower revenue reflects a planned promotion during Q2 for our partners. We continue to see bike sales as a valuable lever to drive higher LTV across our subscriber base as bike customers show more engagement than lower churn. Moving to gross margin. We achieved a gross margin of 61.3% for the quarter, which is a 1,260 basis points improvement from the same period last year and 170 basis points below the prior quarter. Digital gross margin was 75% for the quarter, which is 150 basis points less than the same period last year. The lower gross margin is due to deleveraging of fixed costs against lower revenue. Compared to the prior quarter, digital gross margin was 190 basis points less due to higher depreciation from our recent BODi platform investments and higher customer service expense given the large migration of customers from BOD to BODi. Nutrition gross margin was 58% for the quarter, which is a 430-basis-point improvement from the same period last year. Better inventory management and lower shipping costs drove the improvement. Compared to the prior quarter, nutrition gross margin remained consistent. Connected Fitness gross margin was minus 70% for the quarter, a significant improvement versus minus 197% a year ago, driven by lower cost basis on bikes and fewer reserve charges for inventory. Compared to the prior quarter, Connected Fitness gross margin declined 44 percentage points. Connected Fitness gross margins declined sequentially due to an inventory reserve charge and promotional offerings during the quarter. Bike sales are generating cash as we continue to wind down the bike inventory purchased two years ago. Next, our operating expenses were $107 million, representing a $25 million reduction and a 19% improvement from the same period last year. We continue to evaluate our expenses and remain committed to lowering our cost structure. Let me walk through our three OpEx sides. Sales and marketing was 57% of revenue, compared to 48% in the prior year and 53% in the prior quarter. The higher spend as a percentage of revenue is unique to Q2 of this year as we held our Annual Summit Event, which had 12,000 participants. For competitive purposes, in 2022, this event occurred in Q3. Enterprise technology and development was 14% of revenue, compared to 14% in the prior year and 13% in the prior quarter. We have maintained our spend as a percentage of revenue but reduced the dollar spend by 23% from last year, while delivering our tech changes on time and below budget. G&A was 9% of revenue, an improvement from 11% of revenue in the prior year and 12% in the prior quarter. The dollar spend was down approximately 40% from last year. We continue to aggressively manage our G&A, reducing our spend both as a percentage of revenue and in total dollar spend. Overall, we delivered on our commitment to dramatically cut costs and we are pleased with both the gross margin and operating expense improvement. Net loss improved to $25.7 million, compared to a net loss of $41.9 million in the prior year and a net loss of $29.2 million in the prior quarter. Adjusted EBITDA was a loss of $4.8 million, compared to a loss of $1.5 million in the prior year and a loss of $0.9 million in the prior quarter. Adjusted EBITDA was ahead of our guidance, excluding our Summit expense of $7 million, adjusted EBITDA would have been profitable. Moving to the balance sheet and cash flows. Our cash balance was $59 million, compared to $66 million in the prior quarter. The decrease in the cash balance improved by 50% from $14 million to $7 million this quarter. Inventory was $43 million, down from $48 million in the prior quarter. We continue to manage our inventory balances to minimize write-off exposure. We have been pretty successful at demand and supply planning, which is reducing our need for inventory commitments. Our cash used in operations in the second quarter was $6.5 million versus breakeven in the prior year and $7.9 million cash used in the prior quarter. We have significantly reduced our cost structure, but the decline in revenue has offset that benefit in recent quarters. Additionally, most of this cash used in the second quarter was related to the Annual Summit Event and it is not a recurring quarterly event. We will continue to adjust our cost structure so we can generate cash flow from operations. Our cash CapEx for PP&E was $1.6 million this quarter, a significant reduction from the $6.8 million in the second quarter of last year and $3.4 million in the first quarter of this year. Our cash CapEx for content was $3.1 million this quarter, a substantial improvement from $5.5 million in the prior year quarter. It was $2.2 million in the first quarter of this year. So total cash CapEx in Q2 was $4.7 million and that should be our approximate run rate in the coming quarters. The CapEx improvement has been driven by our digital and technology platform consolidation. Turning to our outlook for the third quarter. As a reminder, our guidance is based on where we stand in our transformation journey. For the third quarter, we expect revenue to be in the range of $120 million to $130 million, we expect adjusted EBITDA to be a loss in the range of $3 million to $8 million and we expect continued improvements in our cash usage. Importantly, from a cash tacking, if we come in at the lower end of our EBITDA loss guidance of $3 million, we would have zero cash used in operations. Whereas if we were to come in at the higher end of the EBITDA loss guidance of $8 million, our cash used in operations would be less than $5 million. To summarize, we are excited about the journey ahead and BODi. We have been adjusting to the consumer environment with a focus to drive long-term profitability and free cash flows. Now I would like to turn the call back over to Carl for some concluding remarks.

Thanks, Marc. Over the last 12 months, we’ve delivered against our strategic objectives. We simplified our business model, upgraded our subscription platform and dramatically reduced our cost structure. Now that we’ve firmly established the base, we’re building on that progress by focusing on five key elements; first, transitioning our subscriber base to a more profitable ARPU or average revenue per user; second, aggressively mining our churn database of over 14 million people from the past six years at minimal customer acquisition cost; third, we’re more aggressively utilizing outside channels to acquire incremental customers for the company; fourth, we’re focusing on cash generation and targeting the most valuable subscribers; and finally, our activities and decisions will reflect our efforts to maximize cash flow. Okay. With that, Operator, let’s open it up and see if there’s any questions.

[Operator Instructions] Our first question is from Linda Bolton-Weiser with D.A. Davidson. Your line is now open.

Yes. Hello. So I’m not sure I understood why if the main reason for the EBITDA negativity in the quarter was the $7 million of convention expense and that will be in there in the third quarter. What’s the key reason that EBITDA is negative then in the third quarter for the guidance?

Hi, Linda. It’s Marc. Last year, the event occurred in Q3, so the expense was in Q3. This year, the event occurred in Q2, so the expenses in Q2. It will not be in Q3. So that $7 million will not be recurring in subsequent quarters this year.

Right. So then wouldn’t that make the EBITDA go like the improved sequentially quite a bit versus negative EBITDA in the second quarter. Wouldn’t it improve by $7 million sequentially.

Yeah. Yeah. Sequentially, it will improve $7 million as it relates to that factor, obviously, driven by the rest of the revenue outlook. So that’s why we gave EBITDA guidance loss of $3 million to $8 million in Q3.

Okay. So, well, all right. So the EBITDA was negative $5 million in the quarter. So $5 million, $67 million, so it would be positive $2 million. So I guess there’s other offsetting factors that are negative in the third quarter, offsetting that swing, is that the way to think about it?

Yeah. I mean, it’s based on the revenue guidance we gave of $120 million to $130 million versus the actuals that we just reported in Q2.

Okay. So I think a while back, I can’t quite remember when, but you had said that by the end of the year, you would be consistently EBITDA positive quarter-by-quarter. So are you still thinking that. I guess that means fourth quarter would have to be EBITDA positive. Is that still a target that you’re thinking of or has that changed a bit?

Yeah. I mean, listen, now that we’ve finalized our results for the first six months, we obviously wanted to see sequential improvement this year. Since that hasn’t happened, that’s why we’ve implemented the turnaround plan. So we -- when we launched our transformation last year, we said three things are going to happen. We’re going to launch a new digital platform, which we did, having great reception, we’re going to dramatically cut back our costs, which we did and we’re aiming for sequential revenue improvement. Since that hasn’t happened, that’s the essence of that turnaround plan we implemented in all the initiatives that Carl talked about. With that coming about, that’s why it would be more prudent. We’re pushing out the -- that Q4 guidance we previously gave on EBITDA.

Okay. And then, sorry if I missed this, but where is the money, where is the cash -- where does the cash come from to repay the $15 million of debt?

Yeah. Linda, when you say where it came from, we have the cash on the balance sheet. When we raised the debt last year, we just finished the quarter with $58 million in cash and since our spend is coming in line pretty well, we’re not going to be burning as much cash as we did in Q2. So that’s why we gave cash guidance as well, and we said, if we come in at the EBITDA loss of $8 million, we would burn cash flow from operations in max of $5 million. And if we come in at the $3 million range, we’ll break even. And we’re also selling more bikes, which frankly generates cash, while being a drag on EBITDA, but it’s some cost as it comes out of inventory. So we feel pretty comfortable, Linda, that in coming to terms with Blue Torch, where we negotiated our new revenue covenants, we came to agreement with them that we could pay down $15 million of the debt and based on our turnaround plans and generating revenues that will be more higher cash contribution margin that we could pay down that part of the debt.

So, sorry, I guess, I misunderstood. The $15 million pay down is in the third quarter. It didn’t happen in the second quarter. Is that correct?

That is correct. We did it after in July.

Oh! I got you. Okay. All right. Okay. And then just my final question is about channel conflict potential. I guess with direct sellers in my experience, it’s always a really big risk when you start selling your products on Amazon and the Coaches are trying to sell the same products. It usually causes a problem. Are you going to be selling slightly different SKUs on Amazon or how do you intend to manage the channel conflict potential?

Yeah. Hi, Linda. It’s Carl. Obviously, that’s something that we’re extremely sensitive to. And we’ve got -- if you recall, we have the latter line of supplements, which is the sports supplement line, which is available to us and we’re obviously very sensitive to the effect of channel conflict. However, what’s interesting is, the all channels benefit from a higher visibility and marketing to drive all channels, rising tide floats all ships, if you will. And I got off a call yesterday with our leadership partners and they are very eager to see us return to the visibility of a multichannel, multi-sales channel company like we were in the early days of the network. So while the sensitivities to channel conflict are important, the TAM is so broad and so available. The most important thing is that our story gets out there so that all the partners and all the channels have the benefit of that leverage. So we’re going to pay attention to it, but we feel like the synergies are greater than the competition.

Okay. Thanks. That’s it for me.

Thanks, Linda.

Our next question is from Jonathan Komp with Baird. Your line is now open.

Yeah. Hi. Good afternoon. Thank you. Marc, can I just follow up on the outlook for the back half? I know you mentioned previously thinking you could see sequential improvement in revenue, total revenue and now that things changed there. Can I just maybe ask further what’s changed in that outlook. I think, previously, you mentioned the substantial increase in your subscription costs would drive a sequential improvement. So just any more thoughts on what’s changed and how you’re planning the business going forward here?

Yeah. Jon, I think, as we said, we had three major changes to deploy, right? We adjusted the cost structure dramatically, fixed the gross margin. The new platform is having great renewals or customers are loving it. Our new sales acquisition -- new customer acquisitions has not picked up at the pace we’d like. So if you think about all these initiatives, we talk about launching, Carl mentioned quite a few of them, that should drive revenues at our higher cash contribution margin. So it just delays our Q4 EBITDA commitment that we’ve done in the past. But we feel pretty good about all these changes that are coming about, because they are higher cash contribution margin and we’re really focused on, frankly, changing that cash balance and driving it north from where it is.

The big -- this is Carl. Hi, Jon. The big lever, obviously, is our database activation efforts, which is a very low cost of acquisition, obviously, minimal, because we already have those customers. That can be a highly cash accretive activity, but we can’t overestimate what it is, because we’re just getting it started. But that opportunity exists now that we’ve got the team built and that’s based on the testing that we’ve done in July, we feel that it’s going to be an important component of our turnaround efforts.

If I could follow up there, Carl. I know you’ve had a substantial database and run and operate this business successfully for many years. So maybe what haven’t you done in the past and why that you have the opportunity to do now and what are the challenges today as you’ve cut costs dramatically, building new teams and implementing new strategies successfully?

Yeah. I’ll start with the last part. Frankly, the cost cutting has been a real gift to the business because it’s simplified the operation of the overall business. So every little bit of leverage that we apply to marketing and sales benefits the one platform that we’ve got rather than be spread across three different subscription tiers or the other openfit platform that we had. So we’ve got just much more leverage on SG&A than we had even a year ago. But there’s a couple of areas that, as you know, we’ve known each other for a long time, the infomercial business was quite productive for us. It takes -- it’s taken some time to rebuild the direct marketing business and understand the relationship of direct marketing and customer acquisition and how expensive that can be and the value of a name that is in that -- in the database. And quite frankly, if there’s anything that I regret, it’s how slow I was to build the team and to get technologically sophisticated with understanding the value of that database, as Marc said in his opening comments, it would take us literally a couple of billion dollars to acquire the critical mass that we have in that database. So now that we found the expertise, we found just a brilliant executive who has done this before, and frankly, have the creative marketing and offer talent on the team to be able to leverage that database for ongoing lifetime value and reactivation. And the one thing that I’ll say that we didn’t have before, was the leverage of this new premium subscription tier at $179. And that gives us the flexibility to be creative with the offer structure to attract or reactivate that database. So the business model overall has matured to the point that it’s simplified to the point that now we have a clear offer and message that help us team message to bring the only total solution of fitness, nutrition and mindset to that database that has already churned at compelling offers with a team who understands how to cohort it and maximize that opportunity. For the first time, I feel like we’ve got the sophistication to execute on this plan.

And just last one for me, if I could. The digital subscribers, could you share where you forecast the number of digital subscribers eventually to bottom? And then roughly at the third quarter revenue run rate, around $500 million annually. Is that a level that this business can be cash flow positive, and if not, any insight on what level of revenue you may need? Thank you.

Jon, just to make sure I got the second part of your question. You asked what level can we be cash flow positive? Did I catch that right?

Yeah. That’s right.

Okay. Okay. Yeah. Jon, I would say, our -- if you look at our -- I mean, if you look at our revenue, right, they did come down 25% year-over-year, but our gross profit only came down 5% year-over-year. So we’ve been really diligent on the gross profit side. So our gross margin, I think, over time, will continue to enhance. And then on the OpEx side, we still -- I think we’ve done a lot, but we still got some to do. All that to say, I think, the biggest part of the OpEx, I’ll get the benefit is by these new revenue streams that Carl is talking about when we talk about reactivating past customers or creating that free-to-view tier subscribers that we then upsell to, those have very little sales and marketing costs. So that, I think, will improve our sales and marketing as a percentage of revenue and that’s what’s going to help us get cash flow positive at the size we’re at. So I think we’ve run it really well where we could get cash flow positive at this size. In terms of your questions on the subscriber base, but we’re not giving guidance on that front. But I think when you look at the BODi subscriber base, it’s up 77% quarter-over-quarter. I mean, obviously, it’s not going to continue at this rate of percentage increase. But definitely, it’s growing at a very healthy rate. And then you could do the calculus as to how many of the basic BOD, Beachbody on-demand subscriber base is left. So as we cycle through those, and we previously said, we cycled through them through March, but obviously, they’re a lot more skewed to the front part of the year than the second half of the year will be some pure BODi subscription.

And I’d say -- this is Mark Goldston. You also have the $14 million database program to recapture the people through CRM. So if you think about, Jon, the sub decline in Wynwood [ph] bottom, you not only have this great 77% quarter-on-quarter at the 179 level. So we’re not worrying about the expiration of the 99 cohort, but you’ve got this huge database of these 14 million people that when the offers have been pinpointed as to what’s going to work the best and you put it out there, you literally have almost zero customer acquisition cost and you have modest network compensation costs, which will certainly help to fortify over the long-term subbase.

And I’m sorry, Mark, if I could follow up once more. I believe last year, you adjusted your gross profit. So I would have the adjusted gross profit down more than 5%. And maybe the real question is, the sequential gross margin looks lower than the first quarter. Can you just maybe reconcile that given the higher price point, and sorry, that’s my last question.

Yeah. On the gross margin, you’re asking why quarter-over-quarter, it was a bit lower, because it was substantially more than a year ago, as we said. On the nutrition side, it was the same in Q1 versus Q2. On the digital side, because we have a large migration of BOD to BODi, obviously, that results in more people calling customer support. So that’s increased a bit that expense. And also the preparation of the platform where we capitalize that expense, we started amortizing it in Q2. And then Connected Fitness. We did got -- we did run a promotion in Q2 for our partners, our partner network. So that’s why you could see the volume of bikes went up, but the revenue then went down a bit and that’s all about driving inventory that translates to cash, right? And then I think as eventually that inventory on the Connected Fitness side, frankly, stabilizes, that’s when you’ll see an improvement in the overall gross margin of the business.

Okay. Thanks again for taking all the questions.

Thanks, Jon.

Thanks, Jon.

Our next question is from Darin Tuttle with Singular Research. Your line is now open.

Yeah. Thanks. Thanks for having me on here. So just going back to the inventory purchase and service agreements for a second, because I’ve had some trouble kind of keeping tabs on this over the last couple of quarters. If I look at the service agreement obligations that are scheduled out to 2028 and then I’m just focusing on the next six months out to 2023. Are you -- is there still a commitment on the inventory purchase agreements of around $22 million to close out the end of the year. Does that sound about right or is that based on the pay down that you just recently mentioned, is it going to be less than that $22 million for the next six months? Thank you.

Yeah. Darin, the majority of those commitments relate to normal course of business purchases for our nutrition business inventory as that goes into our COGS. So I know I’ve been asked that question before, are these commitments above and beyond normal course of business. Now for the most part, these are just normal purchases we do on the nutrition side. So it’s nothing that’s going to be overly taxing in any way. So we need them to keep driving our inventory and our nutrition business. And then you can see our inventory balance continues to decline quarter-over-quarter as we manage supply and demand filing really well.

Okay. And so would the expectation be or would the guidance be similar to these inventory drawdown levels being in line with maybe topline revenue or should I think about it as something that’s kind of separated between nutrition and the Connected Fitness? Thanks.

I think it’s good to think about it separately, because as it relates to our nutrition business, you got to keep retooling that inventory and I think we’re approaching a healthy level of inventory there. I think on the bike business, as you know, bikes, I mean, these are commercial grade bikes. They don’t expire. We’re selling through that inventory. So we’re not planning any purchases anytime soon. So that inventory level will continue to decrease in the coming quarters.

Okay. Thank you. No more questions. Yeah.

There are no more questions. So I’ll pass the call back over to Carl for closing remarks.

All right. Thanks. Thanks again everyone for joining us for today’s call. Obviously, we appreciate our stakeholders, our subscribers, our partners and our corporate team. This turnaround, we’re excited by it and we hope to bring you news of some successes that occur over the course of the third quarter. Our determination to build the category of health esteem and to help more people achieve their goals and lead healthy fulfilling lives is important to us as a company, as an organization, and I remain determined and committed to achieving our near-term goals, being good fiduciaries on behalf of our stakeholders and our long-term goals on behalf of our stakeholders and the customers that we serve and I appreciate everyone who supports us in this important work and look forward to updating you again in the next quarter. Thanks, everybody.