Jirka Rysavy - CEO Paul Tarell - CFO.

Mark Argento - Lake Street Capital Markets Eric Wold - B. Riley FBR Steven Frankel - Dougherty & Company Darren Aftahi - ROTH Capital Partners Matt Sweeney - Laughing Water Capital.

Good afternoon, everyone and thank you for participating in today’s conference call to discuss Gaia Inc.’s Financial Results for the First Quarter Ended March 31, 2018. Joining us today are Gaia’s CEO, Jirka Rysavy; and CFO, Paul Tarell. Following some prepared remarks, we’ll open the call for your questions.

Before we get started, however, I’d like to take a minute to read the Safe Harbor language. The following constitutes the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The matters discussed today include forward-looking statements that involve numerous assumptions, risks and uncertainties.

These include but are not limited to, general business conditions, historical losses, competition, changing consumer preferences, subscriber costs and retention rates, acquisitions, and other risks and uncertainties detailed from time-to-time in our filings with the Securities and Exchange Commission, including our report on the 10-K and Form 10-Q.

Gaia assumes no obligation to publicly update or revise any forward-looking statements. With that, I would now like to turn the call over to Gaia’s CEO, Jirka Rysavy. Please go ahead..

Thank you, and good afternoon everyone. Our first quarter results ended again ahead of our expectation. Paying subscribers grew 7% to 421,000 from 247,000 a year ago and 364,000 90 days ago. This is ahead of the pace needed for reaching our target of one million subscribers at the end of the next year.

Streaming revenue compared to the same quarter last year, increased 75% and total revenue 66%. Gross margin grew 100 basis points to 86.8%. And we expect to maintain this level for the rest of this year. We have again maintained our investment discipline.

We were able to meaningfully decrease our dollar spending per customer acquisition to mid-80s from mid-90s a year ago. Being ahead of the pace for our 2019 target, we now plan to focus on bringing more of higher lifetime value member, rather than keeping decreasing our costs per acquisition.

As of March 31, we have $50 million in cash, $27 million headquarter campus and no debt. And Paul will now speak more about the quarter. .

Thanks, Jirka. Streaming revenues in the first quarter increased 75% to $9.1 million, compared to the year ago quarter, due to continued strong subscriber growth. Gross profit in the first quarter increased 66% to $8.3 million, compared to $5 million in the year ago quarter. Gross margin increased 100 basis points to 86.8% from 85.8%.

The increase in gross margin has continued to be driven by increased revenues and lower per subscriber costs to deliver our service, including continued efficiency in our per subscriber cost of streaming and content. As Jirka mentioned, we expect to maintain our gross margins at this level through 2018.

Total operating expenses in the first quarter were $16.2 million, compared to $11.8 million in the year ago quarter. Most of the increase was driven by increased spending on customer acquisition costs to support our accelerated growth rates.

It's worth highlighting that our customer acquisition costs as a percentage of streaming revenues, declined to 109% in the first quarter of 2018, from 121% in the year ago quarter, despite the increase in volume of subscribers added.

This is due primarily to continued efficiencies in our marketing efforts, which as Jirka mentioned, resulted in reducing our average per subscriber acquisition costs to the mid-80s in the first quarter of ‘18 from the mid-90s in the year ago quarter.

It's important to reiterate that we include all marketing expenses in these numbers, including the costs of translating our existing library and launching our foreign language offerings in the first quarter of 2018.

The first quarter is typically our strongest quarter for adding subscribers to our yoga channel, which is the channel we spend the least per subscriber to acquire, but also have the lowest lifetime value of our channels.

As Jirka mentioned, with our focus on growing to one million members by the end of 2019, we will be emphasizing our customer acquisition efforts on our highest value subscriber segments for the rest of the year.

We will be targeting investing 95% to 105% of streaming revenues each quarter in the subscriber acquisition efforts for the rest of the year, while maintaining our discipline of not spending more than 50% of lifetime value per subscriber. This represents a modest decline from the rate of investment in the first quarter as noted earlier.

With the success of the past seven quarters executing on our plan, we have given ourselves the ability to really focus on these higher value segments, which are more challenging to find, but (indiscernible)..

And this is the operator. We're experiencing just a brief interruption in today's conference. Please remain on the line while we establish the speaker’s line. Thank you for your patience. And once again, we are experiencing just a brief interruption in the conference today. Please remain on the line and the call should resume shortly. Thank you.

And please continue. .

Sorry about that. So I'm going to go backwards a little bit to make sure that everyone got the point here. So total operating expenses in the first quarter were $16.2 million, compared to $11.8 million in the year ago quarter. Most of the increase was driven by increased spending on customer acquisition costs to support our accelerated growth rates.

It is worth highlighting that our customer acquisition cost as a percentage of streaming revenues, declined to 109% in the first quarter of 2018, from 121% in the year ago quarter, despite the increase in volume of subscribers added.

This is due primarily to continued efficiencies in our marketing efforts, which as Jirka mentioned, resulted in reducing our average per subscriber acquisition costs to the mid-80s in the first quarter of 2018, from the mid-90s in the year ago quarter.

It's important to reiterate that we include all marketing expenses in these numbers, including the cost of translating our existing library and launching our foreign language offerings in the first quarter of 2018.

The first quarter is typically our strongest quarter for adding subscribers to our yoga channel, which is the channel we spend the least per subscriber to acquire, but also have the lowest lifetime value of our channels.

As Jirka mentioned, with our focus on growing to one million members by the end of 2019, we will be emphasizing our customer acquisition efforts on our highest value subscriber segments for the rest of the year.

We will be targeting and investing 95% to 105% of streaming revenues each quarter into subscriber acquisition efforts for the remainder of the year, while maintaining our discipline of not spending more than 50% of lifetime value per subscriber. This represents a modest decline from the rate of investment in the first quarter as noted earlier.

With the success of the past seven quarters executing on our plan, we have given ourselves the ability to really focus on these higher value segments, which are more challenging to find, but have much higher retention.

With a lifetime value of roughly double yoga subscribers, the long term impact of this focus will result in a much higher return on our investment in customer acquisition efforts. The overall net loss in the first quarter was $6 million or $0.39 per share, compared to a net loss of $6.2 million or $0.41 per share in the year ago quarter.

As of March 31, we had $50.7 million in cash compared to $32.8 million at the end of 2017. On March 26, 2018, we closed an oversubscribed public offering of our Class A common stock, issuing approximately 2.7 million shares, which included the full over allotment. We received net proceeds of approximately $37 million.

This offering brought our outstanding share count to 17.88 million shares. I'd like to point out that the majority of our board of directors and executive management team, participated in the offering. The offering will now allow us to retain ownership of our corporate campus, which is becoming a strategic part of our future community Initiatives.

During the quarter, we also paid down our $12.5 million line of credit that was outstanding at December 31 and now carry zero debt. With that, I’d like to open up the call for questions and turn it back over the operator..

Well, thank you. [Operator Instructions]. Our first question today will come from Mark Argento with Lake Street Capital Markets..

Hi guys. Good afternoon. Just a couple of quick questions. First off, can you talk about, to get to that million sub mark by 2019, what your plans are in terms of additional channels above and beyond what you have currently.

And then also wanted to get a better feel for how you see kind of end of year 2018 sub number, if you're comfortable talking about that. Thanks. .

So the next channels, we don't really need any new channels to hit our million subs at all. However, we’re probably going to bring either conscious like - I mean expanded consciousness or alternative healing. But we clearly don't need that for the numbers and I don't expect there will be a dramatic portion of that million.

As far as the - where we plan to be end of the year, we kind of plan to be pretty consistent on the pace as much as we can. We'll see how it is through the summer. We don’t have specific guidance for end of the year because I don't think it’s that important, at least for us. But it's not going to probably vary much from the average gross rate.

We’re a little ahead of the gross as you noticed. What we need to get there for the million kind of the next year, and that's why we kind of want kind of bring really up our ante, so it’s how much we spend per - which kind of customer we have. We want to go more for the higher life - like the world-class customers.

And we kind of start to see that our lifetime value, what we call mature customers, increasing. But averages because we take it - basically we have so many new customers with this high growth kind of tick up only slightly, but in mature customers different.

So I think we still kind of look at this optimal gross rate by the quarters because first and fourth quarters are easy to get customers, same for us or Netflix. And so we'll see how it goes for summer.

But I would say kind of you can expect pretty even pace between now and then as an average and then some quarters will - at the very end, there will be recollection what's happening in the quarter, unlike acquiring media, especially like YouTube, Facebook, those kind of media. .

So just back to the envelope math, it looks like with this recent capital raise and some - and hopefully at some point in time, you start to get some additional cash, or if you do have cash flow now with additional cash flow build in, which you can reinvest back in the customer acquisition.

But this capital should get you pretty closer, if not all the way to that million sub mark in ’19.

Is that an accurate statement?.

For sure..

More than accurate..

We would have a spare spur capital right now because the offering was six times oversubscribed. So we try to - we get - took little more money than we actually planned - needed and planned to take. So we have some spare as well. But yes. So don't expect any more. We don't really plan to do anything on that side.

Also, as we kind of get more to breakeven point, that negative working capital will show up. .

Great. Thank you guys..

Just one another thing on the capital. Yes. One other thing, Mark. We did pay off the line, but it's still available to us if we need it through the end of 2020. So that was part of the reason why we don't look at that structure as a line of credit. .

And Mark, we didn't have a feedback here. So we kind of know we said the call was dropped. It wasn’t somewhere in operator side, but we don't know what happened.

Did you hear everything, what we said on prepared remarks?.

Yes. We heard most everything and then it came back. So yes, I think everybody should be up to speed. .

Okay, thank you..

Thanks. .

And next will be Eric Wold with B. Riley..

Thank you. A couple of questions as well. I guess one, just to follow on to Mark's question on kind of the new content. And I know, Jirka you mentioned you don't really need to launch any new channels to reach that million sub target by the end of next year.

What would be the - I mean the process of launching a new channel, pulling out either expand consciousness or alternative healing, alternative health out of the content that you currently have? I'm assuming the incremental expense will be relatively minimal, but should allow you to potentially target a new group of subscribers that may not be kind of being hit right now.

Is that correct?.

Yes, you’re correct. The content spend will be consistent regardless if you’re launching it or not, because we don't really plan per channel. We kind of do per title. So it's the question, what a title will be. So I don't think we fundamentally change the number of titles. We would just shift them to new channels.

So I don’t think the content spend will not be affected if we launch it or not. We grow the content spend maybe half pace or we grow the subscriber pace, money cost per hour. So and it's regardless which new channel we launch. .

Okay. And then, Paul, on the comments that you expect the ratio of subscriber acquisition cost spend to revenues to kind of be in that 95% to 105% pace the remainder of this year as you focus on the higher profile subscribers.

Can you give us the comparable levels for last year?.

Sure. So we just ran through the - as a percent of streaming costs and this is just - we've talked about it previously, but I’ll just give it to you. So as I mentioned in my prepared remarks, it was 121% in Q1 ‘17. And then it was 99% in Q2 ’17. Dropped down to 86% in Q3 ’17. And then as we said on the last call, it was 93% in Q4 ’17..

And 109 in the first quarter..

And 109 to just reiterate for this Q1..

Okay. So possibly a little higher spend this year to kind of ramp up that subscriber before we start seeing possibly more efficiency in the next year. .

Yes, and if you - I kind of alluded to it in my prepared remarks. But if you think about a yoga subscriber with about half the lifetime of a seeking truth subscriber, we’d effectively have to acquire close to double the number of yoga subscribers if that's what we focused on. So it's really about the point.

And as Jirka mentioned, the two plus year mature members has been increasing in value, and that's been the most predominant in that channel. So we're really trying to optimize for the beyond 2019 value of the subscriber base. .

If you take that dollar spend because most of them is spent in the first quarter, so you - that guidance, what he gave you like 95 to 105, it's actually a slight decrease from overall spend. So it's not actually going up. It’s going down, but it's - we’re not going to grow as dramatically as we did before, same as I mentioned per customer.

It will - it came down pretty dramatically, the acquisition cost from the 90s to mid-80s. But we kind of don't want to really keep dropping it. We had rather increase the value of the customer, lifetime value per customers and keep driving the cost down enough several dollars. So it's still slight decrease, but it's not really dramatic decrease. .

Okay, understand. And then just final question.

Any initial read or kind of results you can give us on what you've seen from the international, the new language launches over the past couple of quarters in terms of subscriber growth or kind of where your subscribers are coming from?.

Yes. I mean we have - we didn't really - we don't need anything again from million. So it's like opportunistic. We start to look at marketing a little bit more in places like Australia, which is still a more English language and Canada, which we didn't. Australia have very good results, their conversion there is higher than the United States.

The true International like different languages, we don't really push there. Spanish, which is now like been a few couple of quarters kind of results. So we’re going slow, but obviously our acquisition cost is pretty decent there. But there's not big numbers.

The numbers are come more in thousands than tens of thousands and we want to kind of keep it this way. But we might - it depends the results. We’re testing the conversion rate and acquisition cost in different countries. And vase based on that, we would create a plan for next year.

And this year, we don't plan to really spend any money on personal language marketing. We’re still learning from how our responses are per region and also how the content, what we launch in original language compare like dubbing or subtitling.

So we still have more to learn than before we want to spend more - some meaningful marketing money, because we don't need it for the million..

Thank you, guys..

And the next question will come from Steven Frankel with Dougherty. .

Good afternoon. Maybe you could give us a little more insight into what tactics you're going to use to target and capture those higher lifetime value subs that are interested in areas like seeking truth.

Are you going to put out more long form free content like you tried last year? Or what other things might you do?.

The first move, we actually brought in, we created actually a new department which kind of in marketing, but separate, we kind of call sales. And it's really organized.

We have these different we started the process a while ago, what we call ambassadors when we actually pay people like our hosts or our best customers for any people they recommend we retain on a regular basis.

So it's like paying more in a way as we pay like say Apple TV is a percentage of revenue, which is obviously better for - definitely for cash flow because we don't pay like upfront like anywhere else because we pay as we go.

But also it's much more able to target and distinguish customers so we can pay the ambassadors differently for the high value customers. So that's one of the kind of the basic tool, but there's also more - we kind of when we started, YouTube was a good channel for us than Facebook and was better algorithm.

Now YouTube or Google overall kind of use some of the intelligence to improve the searches on YouTube. So YouTube is coming back with kind of better means to target the customers. And also rather than do general to YouTube, you can go different sides.

So where obviously the vlog is a little more costly because you have to spend time searching for these - basically you cannot do like one site like Facebook. So that's actually - it's not that you pay per customer more, but it’s more demanding internally since we’re counting those people’s time, which kind of created a little higher cost.

But those are the two primarily way how we can sort it out. But there's an overall marketing across, it's the direction what Paul kind of is involved is, if you want to say anything about it..

Yes. Sure. Hey Steven. So I think that as Jirka mentioned, that ambassador channel and firing that up, it’s going to take some time to get to build, but we expect that to contribute meaningfully. And then I think the other piece that we've talked a little bit about is this community focus that we're looking at.

And we've actually been part of the sales initiative is actually looking at how do we build a better member referral program. Because if you think about our affinity groups and the people that are really passionate about what we're doing, they will be the best source of future customers. And we haven't really done anything to date to fire that up.

So this is all strategic planning that we're kicking off right now for the rest of this year..

Now because we’re kind of ahead of the plan and targets, we have - that's a nice place to always be. So we have a time to kind of tweak this program without having in a rush or anything. So we would be kind of using that extra room what we have, because still the cost of the customer is lower than we budgeted.

So allows us this nice time to be able to look for more deeper options..

Great. And if you could update me on your organic traffic trends. .

The organics, we probably talked to you a year, two year, the organic are non-paid channels. They were like they increased from 30% to about 40%. It’s kind of now increase it over 40s. And so for recently, it's kind of the low 40s and we obviously would like to grow.

And it's still - it's very nice increase and even the pace kind of staying very high of the new acquisitions. And obviously we'd like to keep increasing the trend. But now in being in 40s, it's very promising. That's one of the reason why our overall cost goes down, because we have more of these organics..

And Paul, I don't want you to be left out of the part. So just a couple of numbers. Stock based comp in the quarter and cash flow and CapEx..

All of those will be in the Q that is being filed as we speak right now, from the cash flow perspective. Stock based comp for the quarter was at 224. .

Okay, great. Thank you. .

And our next question will come from Darren Aftahi with ROTH Capital Partners. .

Hey guys. Thanks for taking my questions. first, if I go back to your commentary about gross margin, I'm just kind of curious why you’re assuming that number will be kind of steady state as you grow your sub base.

Are you going to be investing meaningfully in call centers or kind of an offsetting cost there?.

No. As Jirka mentioned, we tie the dollars that we're investing into content to our subscriber growth. So we have pretty high visibility into what we have invested, into what's going to be rolling into the P&L over the rest of the year.

And any - there's not really major deviations from that, which is what gives us that confidence to say that that's the level that we're going to maintain at. And as I've previously spoken on the calls, we have annual contracts locked in with our technology partners on the streaming side of things.

So I have relatively high visibility through the majority of this year, like into Q4 as it relates to that piece, which gives us the confidence to be able to make that statement. .

Got it. About it. And then on customer acquisition, I know you guys are focusing more on higher cost, but can you kind of give us a relative understanding of the CAT on truth seekers say versus yoga.

And then that updated TAM you've put out, how - what composition of that is truth seekers and how much of an emphasis is that kind of a priority perspective over the next 12 to 18 months for you guys relative to just growing the sub base?.

Right now it's the transformation kind of - because it was our new channel, we really focused on it this year. So basically it’s very close to the truth seekers now. The yoga is still higher because we started with much higher number. Originally we started like 80% yoga. So that's decreasing.

However, when we say seekers, it's not necessarily just the seeking truth. The seekers are people who state - reach kind of a state in their life and they’re actually seeking out. They want to be part of something. You can be a transformation seeker person. The seeker term on its own is kind of separate from seeking truth content.

It’s just the people who, rather than being marketed to, they’re actually actively seeking out and you just need to kind of let them know we hear. So as far as the mix between channels, I expect the channels being kind of even, close to even by end of the year.

And then depends if you add different channels that obviously not only bring new customers, but also because we classify them by behavior, it might per se cannibalize the other channel, because if you lose them, whether you will classify them or something else because the majority - let's say we have somebody we call transformation, but the majority of the viewing will be in the future in alternative health.

We will classify them in alternative health. So if you’re launching a channel, there is some natural water kind of find its level, and people migrate to the new channel as a primary user of their channel. So for us, if they're 50% in that content, what we classify as alternative health, we will classify them alternative health.

So depends what we launch. It will take some other channels down if you do something close to yoga. Some yogis go too if you do something close to some historic like pyramids and some kind of the ancient predecessor of the humans, it kind of shifts differently. So it's - we don't really have per se a plan how much of each we want to have.

We’re obviously focusing on building million subscribers. And long term, if you launch a channel, especially something like now healing, we believe that it will get to the same percentage of the - that the break will be pretty even between the channels. That’s kind of how we plan..

Got it. Just one last one if I may. Just, I know you do testing, small testing in international markets with marketing. Is there anything that you're seeing from those tests and conversion? I know you called out Australia and Canada.

That would get you to spend more aggressively over the next six to 12 months internationally?.

Well I think we're already - as Jirka alluded to, we're already seeing that traction and now it's just a matter of continuing to increase the dollars from a test size perspective to make sure that that conversion rate in CPA holds true as you ramp up the dollars, right? Because when you do small dollar testing, you could not - you maybe not - don't get the same conclusion.

So that’s part of what we're looking at right now. and we really do all of this testing to help us better identify how we want to budget and plan for Q4 and 2019, which are really kind of the peak deployment periods from a capital perspective as it relates to customers just because they're more prone to sign up.

So we’ll be learning through the summer as it relates to those things and then deciding how much we want to allocate away. But what I will say as Jirka mentioned, I do meet on a regular basis with our team and we’re making real time spend allocation decisions based on the results that we're seeing.

So while we don't have a plan to make a major shift to it if it continues to grow, we’ll react to that accordingly..

I think the international, as we kind of do the testing, obviously as we see good results like Australia, we probably put some more dollars. It's kind of interesting, the country like New Zealand, even small might be important to us for marketing.

But overall for us the predictability is much more important than try to kind of over allocate somewhere just because it's short term better, because we're already planning what happened after the million, what the next million or two subscribers come from.

So as far as the predictabilities, more than try to - for the last seven quarters, we try to be as accurate. This is kind of redoing based on kind of mathematical approach. And it's for us more to tweak the model. So we optimize it. Like now we’re ahead.

So we say, let's bring better customer rather than keep dropping the costs, because we already had what we planned to be. So I think this optimizing the model is really key for us for the future as we kind of look at - go to about two million customers.

So for us to create the smarts to go beyond million, it's kind of the key issues for us in the next year and on..

Great. Thank you. .

[Operator instructions]. Our next question comes from Matt Sweeney with Laughing Water Capital. .

Hi guys. How are you doing? So just a question. I noticed in the local filing, the county government filings, that you guys had applied permission to develop some sort of events base.

I was wondering if you could kind of talk about that in terms of how you see that developing, what the costs might be, what the timeline might be and kind of - how that might help drive other assets of the business as well?.

Yes. We kind of - there was actually we try to get it for a while. We have to get a reason and also we don’t want to - there was one of the reason why we took a little more capital under offering. We talked about it for a while. It’s a little premature us to talking because we didn't yet start to build it even.

But our thought is that we will take our premium, what we call hosts, and do something, what we call seminars with them for three days live. And there would be like extra pay. We did two tests and when we charged, like first we charged $300 for the three day stream, second like 450. And we get like $550,000 revenue for like a $30,000 cost.

And so we would kind of create something like that and look at potentially launching some premium subscription channel - no channel, premium subscription. So we'll be like upsell of our subscription and you can get this for free and it will extra pay. But it's a thought.

We didn't really kind of decided yet we’re doing it and you’re not going to see anything in this year. But try to answer the question when you’re sort of filing. It’s a little premature, but it's our thinking. I hope I answer your question..

Sure. Yes. It’s just - I mean it’s obviously - I guess the way I would think about it, a big picture potential project and just staging the game. That makes sense..

There's not much cost short of the building it - we’ll be building into our campus. So there's basically just the construction, but there's a lot of operating cost of that. But it's basically idea to create a premium level subscription. And so today average person pay $100 and this would be like $300 per year and include this.

So obviously much better ARPU and the gross margin will increase as well. .

Okay. Thank you very much for those thoughts at this early term. .

And at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Rysavy for closing remarks. .

Thank you and thanks for everyone for joining and we look forward to speaking with you when we report our next quarter, which will be in early August. Thank you very much. .

Well, thank you. And ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..