BODI - NYSE

Good afternoon. Thank you for attending today's The Beachbody Company's. Inc. Third Quarter 2024 Earnings Conference Call. My name is Jaylen. I'll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. I'd now like to turn the conference over to our host of the call. Please proceed.

Welcome everyone and thank you for joining us for our third quarter earnings call. With me on the call today are Mark Goldston, Executive Chairman of The Beachbody Company; Carl Daikeler, Co-Founder and Chief Executive Officer; and Brad Ramberg, Interim Chief Financial Officer. Following the 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 by 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, net cash and free cash flows. 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 Mark.

Thank you for joining us today. I'll begin by discussing our recent announcement on the restructuring of the company, and the major change to the business model. Then I'll review some highlights of the third quarter performance, and then update you on the progress of our turnaround plan. Then I'll turn the mic over to Carl Daikeler, our CEO, to discuss our strategic initiatives in more detail. And that'll be followed by our Interim CFO, Brad Ramberg discussing our financial guidance and outlook. As of November 1, 2024, BODi has essentially become a new company from the one that previously existed. I know that's a bold statement, but it's emblematic of the massive change to our business model we affected, which has put BODi in a position to be a dynamic, and more nimble company in 2025 and beyond. I would ask all investors and the analysts to cover BODi, to take a fresh look at the company's new business model, and try to avoid direct comparisons with the company that we had prior to November 1st of 2024. Let me briefly review what we've done to re architect this great company, and position ourselves for success going forward. First we decided to eliminate the multilevel marketing or MLM structure that's been in place in this company since 2007. The MLM model is dated, cumbersome, expensive to operate, loaded with passive non-performance compensation expense that's paid to other people, other than those who actually sell the product. And it places a time management burden on participants who have to recruit, manage and also sell. And it carries a negative stigma, which is seemingly associated with all MLMs. And this inhibits new customer signups, and the attraction of new sellers. There clearly was a time when the MLM model worked extremely well for this company, and we greatly appreciate the efforts of all those who participated. But in today's world, we believe the single level affiliate model is better suited to our business. The single level affiliate model, which became effective on November 1, has no upline or downline management tree, no recruiting of new seller requirements, and importantly, no sharing of commissions with other people. In the new BODi single affiliate level model, everyone is in business for themselves. They're independent, they're not part of a team, and they keep 100% of the commissions they earn on everything they sell. No more sharing of commission. This is a huge change and it's one that provides all BODi affiliates with an uncapped pay-for-performance compensation model. It's really quite simple, the more you sell, the more you make and you don't share your earnings with anyone, and there's no one to manage. So the affiliate model will result in a material improvement in our return on ad spend, lifetime value, and with our lower cost model it will significantly improve our economics. The incentive for new BODi affiliate sellers is pretty clear. In the affiliate world where commission rates typically range from 5% to 25%, a BODi affiliate will earn much more than that with commission levels in the 35% to 50% range. This is a highly attractive proposition to the thousands of sellers, who were previously in our network as well as for the millions of affiliate sellers in the market today. The affiliate model just began taking significant-ups on November 1, and we're extremely pleased with the number of sign-ups that we have to-date. The new BODi business model features a multichannel approach that's now unencumbered by the pricing, and customer mapping constraints of the former MLM model. In addition to the new affiliate model, we have a dynamic direct response marketing unit, a growing Amazon business, and we're developing new products in the Nutrition segment under the P90X and Insanity brand names, which are expected to be introduced in 2025 and 2026 respectively, and will be sold in major retailers within the affiliate network and through our direct response business. Remember, BODi has never marketed any of our current nutritional supplements in our direct response business, due to the pricing and customer mapping constraints of the former MLM model. Now that's all changed and for the first time ever, we can actually market products like Shakeology, Energize and the new product lines we're developing where we can sell them direct-to-consumer, through our direct response unit, and then advertise them on Facebook, Google, TikTok and YouTube, which we could never do before. Since my arrival as Executive Chairman 18 months ago, we've conducted a comprehensive turnaround. This involved a massive infrastructure change and this resulted in a reduction of the company's cash breakeven level, by several hundred million dollars from where it was in 2022. Today, we're a much leaner company that's poised to generate significant operating leverage, when we achieve top line growth in the future, as a result of the major reduction in overhead. Now let's take a look at our performance highlights of the third quarter. Our revenues were in line with the midpoint of our guidance, and we achieved extremely healthy gross margins, which improved by 880 basis points year-over-year. Adjusted EBITDA significantly exceeded guidance of $2 million to $6 million by coming in at $10.1 million. This is a massive $15.9 million improvement, versus the third quarter of last year, when we posted a $5.8 million adjusted EBITDA loss. This marks our fourth consecutive quarter of positive adjusted EBITDA. Year-to-date, we generated $19.6 million of adjusted EBITDA. That is a $31.1 million adjusted EBITDA improvement from the $11.5 million loss in the prior year-to-date period. Additionally, we generated more than $5.3 million of positive free cash flow year-to-date, and that compares to a cash burn of $20.1 million from the comparable period. This reflects a $25.4 million improvement. The first phase of our turnaround centered on lowering our infrastructure costs, and rearchitecting our financial model. I'm pleased to report that our third quarter and year-to-date results, demonstrate that we have successfully completed our goal by generating positive adjusted EBITDA, and free cash flow. We've significantly reduced our GAAP net losses, while dramatically lowering the cash breakeven level. Now we're entering the next phase of our journey, and this portion is focused on unlocking the top line potential. With that being said, I'd like to turn the call over to Carl, and he'll discuss our strategic initiatives, as we move into the next phase of our transformation. Carl?

Thanks Mark. The third quarter results are a great indication of how the company is navigating this turnaround, and how disciplined the team has been in delivering on exactly what we've outlined. We know the demand is there, we know the opportunity is significant, and as we've done for 26 years, we're determined to help people get fit and healthy. This mission is more important than ever, especially with the rise of GLP-1 drugs that require a healthy lifestyle, to truly get the benefit of this new category of pharmaceuticals. So we're staying focused on execution. And as proud as I am of our third quarter results, our focus is now on helping our thousands of partners transition to affiliates, making this shift from network marketing productive for them and for the company. Let me give a little more color on the rationale of this transition, because the 17 years we spent in the network were incredibly productive. But over the last two years, negative sentiment toward the multilevel model has made acquiring new customers increasingly difficult. We were running a bifurcated strategy where we deemphasized our offerings on our primary direct-to-consumer website to drive customers to the network website called teambeachbody.com., not only did this cause confusion and increased friction, but we also noticed that conversion rates on the Team Beachbody site were significantly lower than our direct-to-consumer site. We have some of the best fitness programs and nutrition products in the industry, but we were creating an obstacle for the customer to purchase because of growing resistance to the MLM business model. At the same time, our field of partners were increasingly challenged to recruit new sellers and with managing their downline organizations, which took their focus away from the important work of selling and helping new customers get started. Likewise, the majority of our partners weren't optimizing their earning potential because their compensation was being shared and that resulted in declining motivation and productivity. By changing to an affiliate model, we're modernizing the way we sell by keeping our field of partners 100% focused on selling without the additional burden of recruiting and managing a team. And now our partners have the opportunity to maximize their earnings, because they no longer have to share it with an upline, which we believe will lead to increased motivation and sales productivity. This change not only unlocks the selling opportunity for our partners, but also opens up all our sales channels to be far more cooperative with each other and competitive in the marketplace, which means we can help more people get healthy and active, which has been the thing that has set us apart for 26 years. These changes have allowed us to expand our presence on Amazon with new products and aligned pricing. We're launching on Walmart.com in the fourth quarter and we're also planning to expand our affiliate program to TikTok shops by Q2 2025. It really is liberating for the company because it gives our stellar products a chance to reach more people through a much wider variety of channels without competing with ourselves, but instead with the kind of promotional synergy that drove our growth for two decades. After announcing the change to the affiliate model, many of our partners actually expressed relief at no longer having to dodge the question, is this an MLM? And some of our most successful partners who had stopped promoting BODi, because affiliate marketing is just simpler and more productive, well, they're now excited to return and promote our products and programs. And I recently read that 90% of people won't even answer a call if they think it's related to an MLM. What an obstacle to helping people? Like we're already doing something difficult trying to help people exercise and improve their nutrition. So it just didn't make sense anymore to also try to overcome the MLM stigma, despite the incredible work and determination of our partners. So we've collaborated with top affiliate marketers to create a program that's compelling for our partners, while also financially viable and immediately scalable for the company. This program leverages our experience, rewarding our customers for sharing their success on social media without the MLM burden. I'll provide a full update on the affiliate transition at our next earnings call after Q4. However, while still early, I can already say that we're very pleased with the number and quality of partners who signed up to be affiliates since the November 1st launch. And this should bode well for the highly anticipated launch of our new program coming in December called Belle Vitale, which we believe will be a significant addition to the portfolio. Belle Vitale is our comprehensive women's hormone health program that was developed by Autumn Calabrese. She is the fitness and nutrition expert who also created the successful four-week gut protocol for us in 2022. This new program addresses issues associated with women's hormone imbalances, including persistent weight loss struggles and symptoms like low energy, night sweats and hot flashes. Belle Vitale offers a specific step-by-step nutrition plan, an incredibly innovative fitness program using the inexpensive Door track device to replicate the experience of studio pilates equipment and two New proprietary supplements for metabolism, blood sugar, hormone and stress support. Belle Vitale will also include access to the award winning Breathwrk app. This program is a big deal. In over two decades of running this company, I have never seen 12 week results like we've seen from the testing of Belle Vitale and our partners are excited to sell the program as affiliates since they'll no longer share commissions with the multilevel upline. Our plan to further expand our nutrition business is also enhanced by this change to the affiliate model. The affiliate model and performance marketing work together to increase visibility and demand for products like Shakeology and the Body Performance line which have never been marketed outside the network model before. So as we roll out advertising for our supplements, affiliates will now promote the same special offers to their audience on social media, creating a rising tide that lifts all ships. The launch of two new supplements with the Belle Vitale program is particularly exciting as test participants actually asked to buy the supplements they used in the test so they could continue taking them. This is unprecedented demand coming out of a test group and further positions us for profitable top line growth given the far larger TAM about 12 times for nutrition supplements compared to digital fitness. Finally, our partnerships activity is gaining momentum. We're launching a special offer in conjunction with the American Diabetes association going into the New Year, including a fitness program and effective easy-to-follow eating plans. And we're ramping up promotion of our collaboration with Dr. B and Truemed to offer HSA and FSA reimbursement for our programs and supplements, allowing customers to save 40% by paying with pretax dollars. All this is to say, we're actively executing on the second phase of our turnaround. Our products are second to none and we're very excited about the renewed opportunity to create velocity as we go into the new product launches at the end of this quarter, plus aggressive promotional strategies for the first quarter of 2025. Okay. Now let me turn the call over to our interim CFO Brad Ramberg for the details on Q3.

Thanks Carl, and thank you everyone for joining the call today. I will review our Q3 results and provide our outlook for the fourth quarter. Just to reiterate, the company achieved revenue of $102 million, which was the midpoint of our guidance range of $97 million to $107 million and we substantially beat our adjusted EBITDA guidance of $2 million to $6 million, coming in at $10.1 million for Q3 2024. This quarter marks our fourth consecutive quarter of positive adjusted EBITDA. Now let me get into the specifics of Q3. Revenues for the third quarter were $102 million in line with the midpoint of our guidance range. Sequentially revenues declined 7% and year-over-year revenues declined 20%. Q3 gross margins were 67.3% and declined 200 basis points over the prior quarter, but increased 880 basis points compared to the prior year. We're pleased to report that consolidated gross margins are within our long term target of 65% to 70%. Moving to digital and nutrition revenue and gross margins. Digital revenue decreased by 8.6% from the prior quarter to $53.7 million and decreased by 16.5% year-over-year. Revenues were impacted due to pressure in our digital subscriber count, which decreased 3.8% sequentially to $1.1 million and declined 19.7% compared to the same period a year ago. Nutrition revenue decreased 5.4% from the prior quarter to $47.4 million and decreased 19.6% year-over-year. Nutrition subscriptions declined 11.2% sequentially to 130,000 and fell 27.3% year-over-year. Now as Carl and Mark mentioned earlier, we are very excited about our move away from the MLM distribution model to a single level affiliate model, which will broaden our points of distribution and unlock our sales potential. Digital Gross margin was 80.5% for the quarter in line with the prior quarter and representing a 600 basis point improvement from the prior year. The continued strength in year-over-year gross margin was due to lower depreciation expenses and driven by the end of useful life of certain fixed assets and lower content CapEx and related amortizations as we continue to lower our production spend. Nutrition gross margin was 58.6% representing a 220 basis point decline from the prior quarter and a 390 basis point improvement year-over-year. The decline from the prior quarter gross margin was primarily due to seasonal MLM related events. The gross margin strength from prior year was primarily driven by lower depreciation expense, a slight decrease in freight expenses. Moving on to operating expenses. Operating expenses for the quarter, which included $5.1 million in restructuring charges related to the pivot, declined 4.7% sequentially and 21.4% year-over-year to $81.8 million. Selling and marketing expense as a percent of revenue declined 650 basis points over the prior quarter and 930 basis points year-over-year to 44.6%. This significant improvement over the prior year was driven by a decrease in media spend and changes to our partner compensation plan. The improvement over the prior quarter was driven by a decrease in media spend and fewer MLM related events. Enterprise technology and development expectations increased 340 basis points from the prior quarter and increased 430 basis points year-over-year to 19% of revenue. The increase was primarily due to approximately $2.9 million in accelerated depreciation expense recorded in the current quarter related to pivot impacted assets. G&A was 11.5% of revenue, increasing 30 basis points sequentially essentially in line with prior year. We continue to drive expenses to the run rate of our business. Net loss was $12 million compared to a net loss of $10.9 million from the prior quarter. Our net loss in Q3 included $9.2 million of pivot related restructuring expenses. Without these restructuring expenses our net loss would have been 2.8 million for the quarter. Net loss improved from the $32.7 million net loss from the prior year. Adjusted EBITDA was $10.1 million compared to $4.9 million in the prior quarter and a $5.8 million loss in the third quarter of last year. This is our fourth consecutive quarter of positive adjusted EBITDA. Next, moving on to the balance sheet and cash flows. Our cash balance of $32.3 million was unchanged compared to $32.3 million in the prior quarter and our net cash position was $10.6 million at the end of the quarter. Our cash generated in operations for the nine months ended was $9.3 million versus cash used in operations of $14.6 million for the nine months ended last year, a $24 million positive swing in cash generated from operations. Year to-date we generated $5.3 million in positive free cash flow compared to a negative $20 million over the same period last year. We are pleased that we are generating positive free cash flow as we execute through the first phase of our turnaround. The outstanding principal balance of our debt was $25.3 million as of September 30th. In October we worked with our lender, Blue Torch Capital to align our covenants with a new business model that we have just embarked on. This resulted in the removal of minimum revenue requirements. We implemented a reduced minimum liquidity covenant and we've added a minimum consolidated adjusted EBITDA covenant. Lastly, turning to our outlook for the fourth quarter, we expect fourth quarter revenues to be in the range of $77 million to 87 million. We expect a net loss in the range of $21 million to $17 million, which includes an estimated $9 million of pivot related charges and we expect adjusted EBITDA in the range of $2 million to $6 million. Now let me turn the call back over to Mark for closing comments before we start our Q&A.

In closing, I want to emphasize the transformative journey BODi has undertaken. By pivoting from an MLM network to a single level affiliate network, we have massively unburdened our infrastructure. This strategic shift not only positions us to significantly increase our profitability, but also enhances our agility and allows us to respond swiftly to market demand. We successfully removed the stigma associated with the MLM and this has enabled us to maximize individual channels without constraints of our MLM. With these strategic changes, we're now poised to run a pure direct-to-consumer business. This new model unlocks the top line potential for BODi, providing us with a clear path to sustainable growth.

Okay, operator, we can now open it up for questions, please.

[Operator Instructions] Our first question comes from Susan Anderson with the Company Canaccord Genuity. Susan, your line is now open.

Hi, good evening. Thanks for taking my questions. I was wondering if maybe you could expand on the revenue guidance for fourth quarter. It looks like it's a little bit of a step down from third quarter. So I'm curious, is this going to be consistent across the digital and nutrition businesses, or is it one over the other and then I guess, how should we just think about that step down? Thanks.

Hi, Susan, thanks for calling today. This is Brad. So Q4 is traditionally a soft. Hello, can you hear me?

Yes, I can hear you.

Okay. Great. Oh, perfect. Hi, Susan. Now, Q4 is traditionally a softer quarter for the company, so we do have some seasonality. In addition, this is a bit of a transitional quarter for us. This is the first quarter that we're going into the affiliate model. So as Carl mentioned, we're very happy with the number of affiliates that are starting to sign-up with the company. And there's some training that takes time for them to get used to the new software, so that that is well underway. So I would view really Q4, as really a transition away from the network into the affiliate model. And I would expect the mix between digital and nutrition to remain steady. As it's been the last couple of quarters. I wouldn't expect much of a shift in this quarter, and as the affiliates gain traction we'll report on that when we report next quarter earnings.

Okay, great, that's helpful. That makes sense. And then I know you're not giving too many details yet on the new business model, but maybe if you could just kind of talk about the logistics on how that transition to the affiliate program, is going to work. So it sounds like you mentioned that, there's already then some former partners sign-up. So I guess do existing partners basically go on the platform, resign up, and then start selling? And then also I'm curious just how you're marketing this new program, to maybe some other potential people out there that may want to be part of it? Thanks.

Hi Susan, it's Carl. Great question. So yes, we're very pleased with the transition of former network partners over to affiliate, and the enthusiasm that they've got for the more agile business model. There's really we're approaching this from three levels. Obviously we want to maximize the opportunity for our former network partners. So we've given them the incentive to come over and sign up in November. In order to be participating in the highest bonus tier, which as Mark mentioned unlocks the potential for commissions between 35% and 50%. And we will continue then to then open it up to our very broad database, to allow for both our current subscribers and LAPS subscribers, to come in and participate in this almost like a refer a friend type of program. Because - the barrier of entry is so low there's no cost to get started, and it's very easy just to put a link up and say hi, why don't you join me, and do this program with me. So it's an opportunity for everybody to monetize their health and fitness. Finally, we launched this affiliate program on probably the largest affiliate platform in the world, impact.com, with the intent that we might be able to penetrate into their over 300,000 existing affiliates on their platform with one of the most aggressive commission structures in the industry. So we are hoping and initiating in the end of November going into December, to see how many of those existing affiliates on the impact.com platform we might be able to bring in.

Susan, this is Mark. Hi, just to follow-on to close the loop what Carl just said and what Brad shared with you. So this fourth quarter, is really sort of a transition trough quarter for us, because we announced in October that we were going to be moving out of the network. So you had a little bit of the, the band-aid pull off and that, and then we didn't start taking affiliates as signups until November 1. So that's continuing. We're barely two weeks into that, and they have to get used to selling on a new structure with a new system. So really, December will be the first sort of pure affiliate month, because October is still a little bit of a hybrid. November is a little bit of a hybrid, a little bit of network, a little bit of affiliate. December will be all affiliate. So we had a bridge somewhere and we decided Q4, since it's a seasonally lower quarter anyway, was the time to execute the bridge to the other side. Because you definitely would not want to do that in Q1, which is your seasonally strongest period.

Yes. Okay. That definitely makes sense. And then maybe if you could just expand on the Belle Vitale program. Is this still in test phase or I guess, when do you guys expect it to be up and running? And I guess in terms of just like fitting into your existing programs, is it mainly going to be nutritional products that come out of that as well as key advice for women, or how should we think about that? Thanks.

Yes, this is a super exciting program. It's done its testing. We finished that testing late this summer with incredible results. Everybody in it had improvement in their overall symptoms, from hormone imbalances and significant weight loss upwards of. I think our highest was a little over 26 pounds in 12 weeks. It is a comprehensive program including this innovative fitness program, which mimics the kind of pilates moves that you would do on an expensive reformer or Cadillac machine, with inexpensive equipment you can use at home. An easy to follow step-by-step nutrition plan that has phases over the course of the 12 weeks. It has access to the Breathwork app, so to help people reduce stress with breathing exercises, and two proprietary supplements that we're excited to add to the catalog. We will sell this as one bundle for $299 starting December 10. And we already have thousands of reservations effectively based on letting people register for the early bird access to it, back in August. So we're very excited about this launch, about what it does for the end of December, and also going into the first quarter.

Okay. Great. That sounds exciting. It was that 299 you mentioned, was it a couple months or something like that?

It's $299 for the comprehensive three month program. The nutritionals are on what we call a continuity. So when they buy, they get the first month, and then they automatically ship until they cancel. And that's an interesting footnote to it. I mentioned in my opening remarks that for the first time, we had a test group that finished like a test group, they get it for free, right. This is the first time we've ever had participants in a test group, actually offer to buy the supplements after that test was done, which was very encouraging in terms of what the ongoing demand for these supplements will be, when people finish the 12-week program.

Okay. Great. That sounds exciting. I'll go ahead and pass along.

Thank you.

Thank you, Susan.

Our next question comes from Chris Sakai with the Company Singular Research. Chris, your line is now open.

Hi. Yes, I'm in for [indiscernible]. Can you provide more details on the features and capabilities of the centralized e-commerce platform at body.com how does it differ from your previous digital offerings?

Well, essentially this is Mark. Essentially in the previous structure with the MLM, we didn't really have a very robust bodi.com direct-to-consumer website, because we were somewhat hamstrung by some of the equivalency issues that were posed by the MLM. So people were sent by those in the network who would sell them. They were sent to a site called teambeachbody.com. So we had sort of a bifurcated approach and our general consumer website, body.com didn't even sell our nutritional products direct to the consumer. You actually had to come in through a referral from the former MLM network. That's all going away. Team Beachbody will be gone. Body.com will be the primary DTC website for the company. You'll be able to buy all of our products there. And when an affiliate provides you with a link, which gives them credit for the sale, they'll be sending you there to transact your purchases. So it's no more captive sales, no more captive MLM, no more bifurcated approach. Everything will be focused against the single powerful direct-to-consumer website called body.com. All of our products will be sold there and that's where people will be directed to transact.

I'll also add Mark. Okay, sounds good. Because of the change in business model, we have the ability now, to actively market our products within the BODI app itself where we actually serve up the content. So now we can actually market right along the workouts, with our various supplements that can help you get results with those workouts and it takes you right to the body.com site. We couldn't do that before, because of the conflict with the network marketing organization. So now it's really like I said, a rising tide floats all ships.

Great. As you continue to expand your digital offerings and promotional activities. Are there plans to introduce any subscription models, or steered access options to your digital content?

So as you probably are aware, we are right now a digital subscription model. That's what we are in our digital fitness business. You can buy it for a number of months or a year, but you are a subscriber to the process. We also have individual programs that we will sell you. So you could buy P90X for $59.95 and own it for the rest of your days. But the primary focus of our business has been, and will continue to be on the fitness side, subscription based.

Okay. Great. What percentage of your current sales come from mobile devices and how do you expect this to change with the new e-commerce platform?

Well, it's an interesting question. We don't disclose the specifics, but in general, within the e-comm world, you know, 70 plus percent of consumers utilize a mobile platform and about 25% to 30% in general use a computer platform, so desktop or a laptop, et cetera. So as we go forward, I think you'll see more and more people using mobile devices for sure. And we're also going to see more and more people using an app based structure, versus just using pure website access.

Okay. Great. Thanks for the answer.

Sure. Thank you.

At this time, there are no more questions registered in queue. [Operator Instructions] There are no more questions registered in queue. I'd like to pass the conference back over to our hosting team for closing remarks.

Thank you very much operator. I want to thank everybody for attending the call today. We're really excited about this business model transition at BODi, and we look forward to talking to you on the next earnings call, to be able to provide you with some color on how the new affiliate marketing program is going. So thanks every watch everyone. Bye.