Jirka Rysavy - Chairman & CEO Paul Tarell - CFO.

Mark Argento - Lake Street Capital Markets Eric Wold - B Riley Steven Frankel - Dougherty.

Good afternoon, everyone and thank you for participating in today's conference call to discuss Gaia Inc.'s Financial Results for the Third Quarter Ended September 30, 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 would 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 reports on Form 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, James and good afternoon everyone. Our third quarter results ended ahead of our expectations. And subscribers grew 66% to 515,000 from 311,000 a year ago.

We surpassed 0.5 million subscriber milestone on September 13 which was three days early than we plan; this obviously keeps up ahead of the growth rate needed to reach our next 1 million subscriber target. Our gross margin grew again for 90 basis points to 87.1%, and we expect to keep this above same level for the fourth quarter.

We have launched our fourth channel, Alternative Healing. Our third channel, Transformation, which was launched in fall 2016, now represents primary viewing for approximately one-third of our subscribers. We expect that the Alternative Healing channel will follow a similar trajectory meaningfully contributing to our growth into coming years.

We also created our new premium offering available as an annual subscription for $299, it will include unlimited streaming of live events from our new event center which will be opening in our campus in the second quarter of 2019, as well as the streaming from some other selected events.

The premium subscription will also include our existing online offering. We also far expanded our geographical reach to now 185 countries. As on September 30 we have about $31 million in cash and unused $13 million line of credit which is mix [ph] of our campus.

We expect to have about $2 million to $5 million of cash unused when we switch to a positive earnings and free cash flow in first quarter 2020. And now Paul will talk to you more about the quarter numbers..

Thanks, Jirka. Streaming revenues in the third quarter increased 56% to $10.9 million compared to the year ago quarter due to continued strong subscriber growth. Gross profit in the third quarter increased to $9.9 million from $6.5 million in the year ago quarter.

Gross margin increased 90 basis points to 87.1%, up from 86.2% in the third quarter last year. The increase in gross margin has continued to be driven by increased revenues and 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 the fourth quarter.

Operating expenses, excluding customer acquisitions costs in the third quarter were $6.7 million compared to $6.3 million in the year ago quarter.

This moderate increase of 6% highlights the leverage of the model as we continue to scale with almost 10:1 leverage in growth of revenues compared to offering the expenses for the third quarter year-over-year.

We are introducing a metric that we use to attract this leverage, average gross profit per employee; for the third quarter of 2018, gross profit per employee was $292,000, up from $218,000 in the year ago quarter. We expect this number to continue to grow with projected fourth quarter of 2019 gross profit per employee above $360,000.

We will continue to provide updates on this metric going forward. Customer acquisition costs which include all marketing expenses incurred in the period were 125% of streaming revenue for the quarter.

This includes costs associated with the launch of our new Alternative Healing channel, and our premium subscription offering, as well as the ongoing cost of continuing to translate more of our existing library into French, German and Spanish, as we continue to buildout these language offerings.

Subscriber additions during the quarter were weighted towards seeking truth and transformation customer segments which together represented about 80% of subscriber acquisitions in the quarter.

Combining our very efficient 85% of streaming revenues in the second quarter with our third quarter spend, we're at 105% streaming revenues for the six month period despite the increased costs associated with launching Alternative Healing and our premium subscription offering. This is in line with our previously provided expectations.

We plan to maintain this level of spend on a quarterly basis through Q1 2019 after which we expect customer acquisition costs as a percentage of streaming revenues to meaningfully decrease through 2019 and beyond. As of September 30, 2018 we have $30.8 million in cash and an undrawn line of credit of $13 million.

We plan on utilizing our current cash and line of credit to continue investing in our growth through 2019, and as Jirka mentioned, we expect to have between $2 million to $5 million of cash left on the balance sheet upon transitioning the positive earnings and free cash flow in Q1 2020. With that, I would like to open up the call for questions.

Operator?.

[Operator Instructions] And we'll take our first question today from Mark Argento with Lake Street Capital Markets..

I'd like to find out a little bit more about the launch of your latest channel, Alternative Healing, if you've got any early stats there? Then just wanted to see -- check-in on some of the other channels, see if there have been any updates or any changes at all to those content hosts or any other major changes to those offerings as well?.

The Alternative Healing, we just kind of launched it, it's just a couple of days, so cannot really give you any update on that.

It's about close to 1,000 titles right now and we expect that it will kind of start to very similar transformation, it will obviously don't have any acquisition retention data now, it's one of the channel where I would expect actually being as a size of the largest from our -- what we call initiatives, so we know yoga is like 38 million just in U.S.

but I would say probably [ph] Alternative Healing will be little bigger than that but till next call we probably cannot say much and even therefore next call onwards sure we will know much, we probably need good nine months to really kind of see the retention trends.

We would probably know acquisition costs but we did test it, so that's positive but as far as retention, it's hard to kind of speak about it till like probably nine months after the launch.

For the hosts; we added right now several sessions -- new posts in the episodic content and what we also had in [indiscernible], it was kind of interesting, we had to replace one of -- it's kind of first time, one of our club host which had no impact on our viewing of subscription, and it proves that our members generally subscribe to the Gaia brand, not the individual program.

But for this specific show it was actually interesting because we replaced host and guests and our viewing is 30% up since we made a change. So surely said that some suggesting that changing host for the series once a while might be actually good practice.

Then for Transformation; it's right now about even list of other channels, even -- that was before like in June, like Paul said that this quarter we really focus on seekers which -- they are obviously more expensive than yogi, so that's why always when we focus on yogi, especially in the first part of the year, our acquisition cost as a percentage of streamings are much lower in the second part when we go for seekers.

But obviously, the lifetime value is much bigger for seekers; so that shift will be pretty much every year.

So we have kind of -- the yogi's kind of represented more than one-third like -- in the second quarter, we're now kind of shift to the seekers when seekers actually right now fall -- it was about largest segment because we really focus on them right now..

Yes, so last time we said that they were -- it was pretty balanced and I think with Q3 transformation and Seeking Truth over indexing, it's more like 37%, 38% of Seeking Truth up from 33% but it was at June 30..

And we'll probably continue through the next year, we always see kind of our acquisition cost boosts the CPA percentage of revenue which is kind of lower for first spot of the year when the Yogi had more dominant specter of our positions.

Did that answer your question, Mark?.

Yes, that's helpful. And just one quick follow-up on -- in terms of pricing, I know you have the new premium offering you're rolling out.

Any thoughts on as you add more channels, more content in terms of -- any opportunity on the pricing model, maybe pay-per-channel or any thoughts around kind of average revenue per ARPU?.

Well, the premium model on it's own, even if it's small take and we really do expect not much in the first year on revenues but the ARPU obviously -- actually will have an impact on ARPU.

We also going to play for next few months testing actually different price points because this -- we used to price our offering when you launch from Netflix which was -- average was $995 and now the kind of similar offering is like $13.

So this really opened place for us to raise prices, but -- so we will test it and we will tell you more next quarter but we definitely will do testing..

Next we'll hear from Eric Wold with B Riley..

Paul, I just want to make sure I understand you -- I heard you correctly; the subscriber acquisition cost as a percent of streaming revenues is 125%?.

Yes, for the quarter..

And I know that you include other launch costs, I know you talked about breaking Alternative Healing and then your premium subscription; anywhere to kind of pullout, maybe you kind of highlight what the dollar amount in there was? It may not been directly geared towards subscribed acquisitions in the quarter.

And then, maybe what the organic percentage contribution was this quarter?.

I mean, I can kind of start with the organic review; organic was actually slightly up from the last time again.

But we have more on this, especially launching the new channel, that's actually not simple process due some more translation, especially through Spanish which also hid their number, I don't really track it by number, I'm not sure -- we never really disclosed it that way but if you kind of -- want to dig into it more but I'm not sure that it's -- we can probably look at it but it's -- I would kind of say if you're going to look at kind of the hundred -- 105 being the average, that's where we probably going to see both, and averages where we are on next two quarters, so everything over -- a lot of it over will come from the other activities..

And then on -- you talked about kind of staying at this level through Q1 and then dramatically reducing the customer acquisition cost spend starting in Q2 through the end of '19 and then getting to profitability and positive free cash flow in Q1 of '20.

I guess what gives you the confidence that if you drop subscriber averaging cost spend starting Q2 that you can still reach that million subscriber goal by the year end and kind of do it in a profitable manner?.

So I think two things; one is the next five months is really the peak acquisition season for us from the holidays, as well as rolling into the Yoga in January.

And then we've also been discussing a few of the initiatives that we've been building now, member referral and faster [ph] program being two primary ones that we expect to start meaningfully kicking into the total number of subscribers that we're able to add any given period that will be at a much lower cost than our current channels.

And those are today small percentage of total ads but they are starting to gain traction and we're investing behind those programs with headcount dollars, so that's going to be a big driver going into the back half of next year.

Also the organic, we're kind of beyond low 40s, we expect that can keep growing; so those will definitely contribute to that one as well.

And I think it's fundamentally -- it's how many people we have to reach before they go to work, how many touch point we have to ask and that's for us like five quarters we cut that over less than half or it's about right there [ph].

So obviously, we need to spend less to basically convert the customer; so that's what we expect to keep playing as these trend continue. We build into our team all new department with some member retention which probably has right now 25 people; so we didn't have the department year ago at all..

And then on the previous subscription offering, obviously the delta from the current base prices and raised prices and the premium is $180; I guess what's -- what would be offered on average to a previous subscriber because there is a number of live ends [ph] per month per quarter? There is sort of a breakeven or how do we think about that because obviously there is a cost involved with putting on these live events, I think that to have some certain level of previous subscribers to make it worthwhile?.

Yes, I mean it's -- we are kind of expect this year and probably, I mean next to 2019 when we start in second half and then probably to part of 2020 to kind of operate on breakeven basis and P&L basis.

And so we would limit the number of the events but we'll probably start the prime offering would have -- let's say we -- because we're not starting first quarter, so we might have like eight main offerings for the year for that place and each of them, it's priced at $300.

So if you buy the a la carte [ph] which is kind of the industry standards between $200 and $600 where people typically charge for.

And, so -- but we both kind of go cautiously and kind of operate -- we try to upgrade on breakeven basis, doesn't mean that it would not happen that we might have some cost versus second quarter because we wouldn't have any revenues but on annual basis should be breakeven..

Steven Frankel with Dougherty has our next question..

For starters, has there been any material change in the lifetime value of the subscriber, especially between the different parts of interest?.

No, there has been no meaningful change when you look at it. The only change is obviously the number of new people that we've been bringing in as we have continued to go at this higher growth rate.

So that brings the overall averages down but when you drill in and look by kind of seasons [indiscernible], no meaningful changes in the composition of likes into how you buy 10-year band..

Once we go obviously to the mix, remember then we kind of won that number start to increasing but with the mix, you're going to see as we kind of kicked to first quarter of 2020 and we slow down to more like 35%, 40%; then we would achieve -- the number will increase quite a bit because of percentage of new people who get obviously the lowest value and would decrease; so that's probably the first time you're going to see any meaningful difference.

I expect to be pretty steady between now and then..

And the stepped up marketing, where are you spending that money? I did notice a TV ad the other day and wondering whether that was just kind of a one-off experiment or is TV an effective channel for you now?.

So we're always catching things and one of the -- one of our Board members actually is involved with a company that is able to do it highly targeted which is why I'm glad to hear that you saw it because you fit our customer target pretty tightly as a small ad by refer [ph] to see if there is anything there but no, we don't meaningfully advertise on TV today.

And I don't think we will, it's a plan; I think it's pretty much hot online, we don't do -- they are limited, anything that is online including the TV. We did some print exchanges like Yoga journal and stuff like that but I would kind of say -- probably say 90% or more….

95% in terms of payments [ph] with the one caveat being that our channel on [indiscernible] is free advertising and on a cable channel because we don't pay for those impressions when it shows up..

And in terms of online, kind of how are you spending today on Instagram versus Facebook versus YouTube versus the wild Internet kind of -- where is that focus today?.

We continue to explore all of those platforms as we're looking for increasing yield on the dollars that we're spending. So any given campaign can perform better on one of those channels and the others but we have been shifting more meaningfully back to YouTube as their tools have gotten better from a targeting and filtering perspective.

And we're also starting to explore little bit in terms of English speaking international locations to see what opportunities are out there as well..

Also actually on this international, some of the conversion from certain countries like Australia, New Zealand and that part, it's actually doing better than United States. Per capita number of subscribers in those countries are higher than United States..

And have you seen in the last three months a material uptick in your international component?.

Co-related to the effort that we've been expanding to it, soon we now have international marketing manager that's tasked with building that out. So let's say Q3 was the period when we really started to test and learn in terms of paid media, up until then it had been predominantly via organic means.

But that's part of what's driving the increased investment in content side of things to get more of a library available for Spanish because we are starting to see some decent traction there, it's obviously a big language, you can't just break it down by geography but from a Spanish language perspective, we're starting to see some decent traction..

I think there are actually more Spanish and German start to have a traction; so based on that we are translating more titles.

And we're also obviously producing some unoriginal language but there is definitely promising area, it's -- for last few months it's running quite ahead of our expectation, so as we talk next time, we might have something to say but the numbers are very promising but it's relatively too small right now to talk about it but it's the first time I would say that there is definitely some success where we didn't really focus on it before, we just kind of put the content up there.

But both -- what we call non-English and some international -- in English version they both have some very good traction..

And how large is international as a percentage of your base today?.

It's about 30%. And so, obviously on what we call third-party like Comcast and stuff, that's all English. But if you take our direct, so it's probably north of 30% and growing.

It actually picked up very nicely this quarter, if you think it's important we can start to provide those numbers too because those are easy for us to because we track them regularly. It's just -- the number is relatively small but overall number of non-U.S. subscribers is north of 30%..

Our next question will come from Darren [ph] with ROTH Capital Partners..

I wanted to follow-up on earlier question about subscriber ads. Given that we're a month into 4Q and if I look at current consensus before this report for 4Q, it's sort of implied a larger step-up in ads in the quarter.

I'm just curious sort of how comfortable you guys were in reaching those numbers; maybe given that you see some seasonal strength in 4Q and then -- or is it more of 1Q once you can sort of piggyback off of the new offering and some of the marketing initiatives? And then I'll follow-up a bit..

Well, without really talking the consensus staff [ph], but fourth quarter it's always very good quarter for us, pretty much between like mid-October till early February, it's like our best time for us.

So you're going to see it this year, you saw it last year, are you going to see it year after; I think this year we kind of took a little break -- I mean, when you have the election last week but it's not really that impactful, I think Paul can talk about it but generally the 4Q, it's always the best time to do it, we kind of try to do it especially in months of November because you don't want to really compete right before Christmas but it will be same for Netflix and anybody on the business, we're going to have a best quarter, the strongest quarter previous the first one..

And I would add there, one of the things that we've started to do a lot better this year than last year is we actually capture email leads.

So if we don't get a conversion right out of the gate from someone coming to one of our landing pages, we actually look to grab their email, so our email list is pretty strong and we actually use November timeframe to go to that email list.

So I'd say we're probably 30% to 40% up on the number of email leads that we have from last year, so that's going to be a meaningful driver of it, and then also what the Alternative Healing channel, that's all net new from a marketing opportunity perspective for this Q4 compared to last Q4.

And you're going to -- there is this aspect that when the 1Q, especially January-February is mostly Yoga; so if you kind of see -- do you see our fourth quarter typically being our most addition with January. But by the cost, you spend a little more in the fourth quarter than first quarter because it's mostly seekers, fourth quarter is mostly Yogi's.

In the first quarter, we will see how the new Alternative Healing channel will play, obviously, we don't know that yet but -- and the same thing, when you kind of see the first parts over the year, the cost of acquisition at the percentage of revenues is going to be lower and I guess CPI is going to be lower.

But the interesting part that -- what we call organics, actually kept growing through for first three quarter consistently and we'll see how the fourth quarter will actually look on that.

It's too early for us to comment on it but it's a trend what I believe will help us next year together with the new channel because obviously new channel always give us lot of new fishing ponds. And so assuming that we'll do same like the Transformation did, it will also be helpful to us, especially towards this second part next year..

And then, on the premium offering; have you started marketing that at all yet or if you haven't when do you plan on starting? And then, with that marketing efforts, is there any thoughts of doing sort of like a free trail for those who aren't or like free for one event to sort of entice those who may be earning a regular offering? And to sort of see if you can boost them onto that premium channel?.

Well, we kind of -- as far as official marketing, when we kind of hit, most of the people will start like after the New Year. We don't -- when some people -- we test certain things but as well as real marketing will start in the January -- then I will call general public, general subscribers.

Like this, most of those will be upsell to our existing subscribers. And this to be kind of free, I don't think we would consider doing something like free because if you do premium you don't want to discount it.

So I don't think we will do any free but however, we might have some combined deals but for now right now there is no plan to do any free ordeals. I think we just basically -- it's an offering what you can -- if you're an average person, if you have -- you can buy annual for $100, so this was additional $200.

There will be some new subscribers as we kind of market into the databases of some of the speakers but generally we're kind of looking as more player on ARPU and the pre-tax margin than number of subscribers..

And I'm interested to clarify your convention date earlier but we're really looking at '19 as being the learning year for the premium offering, we're not expecting meaningful contribution from a revenue perspective as we get this thing off the ground.

And we'll be mostly marketing to our existing member base to try and get them to convert versus net new..

Next we'll hear from Andrew Boon [ph] with Quantum Capital..

Is there even a callout just on ARPU in the quarter? And then secondly, as you guys -- you know, cash was down $10 million kind of quarter-to-quarter; as you guys start to think about the $1 million goal or the million user goal, is there any process of maybe pushing towards profitability sooner rather than later just as you guys have multiple initiatives that seem to be gaining traction? I don't want to dilute shareholders.

Thank you..

We trust on ARPU briefly in the past but with our $0.99 first month, the reality is that no subscribers that get added into the quarter don't really meaningfully contribute to revenue in the quarter I must have added in the first month. So I'd have going to create some downward pressure on ARPU as we keep growing at the 60% plus rate.

But again, just like your convention was the lifetime value to Steven's question, as soon as we saw the growth rate down, the average revenue per user in a quarterly basis should come back up pretty meaningfully but from our perspective, it's really just a function of when subscribers come in, and then what they contribute from a revenue perspective for the quarter.

I'll let Jirka take the second question..

I mean for us, as we kind of brought pretty clear guidance that when we get to end of the next year, we should have about -- so we have today was the line above $44 million, we should have about $2 million to $5 million left; so that wouldn't say that we would switch earlier but if the market change and their condition change, obviously we switch to profitability.

For us to switch to profitability is very short notice, we can probably do it in a month. So we can see what the conditions are, if between the customer acquisition, the market condition, and how much cash we have; so theoretically we could do it early but it's not the plan right now.

Probably right now is to kind of run it to the $5 million cash left when we switched to profitability. And -- but you know, things can -- like any business can change, but that's kind of deploying [ph] on us, it's pretty consistent plan for us for now as for about two years.

We're hitting the numbers with few days to a week ahead of our budget, so I don't expect any meaningful changes. But as we have the new year, if there is a change in economy or something, we'll provide an update in the coming quarters.

When I said, we want to look attest the pricing, so that's all in effect but for right now, the change is kind of -- the plan that remained unchanged for us, 3 years pretty much..

[Operator Instructions] We'll now hear from [indiscernible]. [Operator Instructions]..

I had a couple of questions and I think you touched on one pretty thoroughly but you had a $60 million EBIT number, 2021, and you've had that number there for a long time but lots of moving parts out there in the last few years.

I'm just kind of curious whether -- what's changed since you -- if anything's changed from the original plan a few years ago?.

Yes, I mean, our plans actually -- we hit the numbers pretty accurately, so I wouldn't say there is any change to our thinking about 2021. Please understand, in 2021 -- 2021 is kind of more as a model than we kind of decide how fast we want to grow but from the model target, it's -- did not change.

I would say if anything, there is upside to those numbers..

And then maybe I was just curious, you mentioned the 25 number retention team; I would love to get more color on that. Is that more gratifying to customers services? What kind of -- what's the mix of that? I would love to get more color on that..

I think with the reality as is, we took a couple of different groups within the organization and put them all under one umbrella and you've had the two big ones. So the customer relations team now rolls into that number retention leadership.

And then also our data scientists, so not necessarily the data engineering folks but the people that are actually using our data to better inform our recommendation engines and a lot of the onsite merchandising network doing.

So if I was to look from a people perspective, I'd say our data scientists and analyst team is probably the same size of our customer relations team and then the balance of those people are that what we call merchandisers, so people that are using the tools that we built for them to actually promote content to our members on the site because we realized that doing just a machine recommendation isn't always the most effective for all of our members with such diverse and broad library of content that we have..

And there is probably this merchandising team as they're now crossing this marketing to tweak kind of the part what newcomer [indiscernible]. I think that's one of the reason why our organic is coming up because this could be more sophisticated what people see when they come in, then also be more flexible, more fluid to that [ph].

So I think that's kind of a big part of our -- I think impact of increasing the organic conversion to our member base..

Our next question comes from [indiscernible]..

Have you seen any evidence of competitors trying to do what you're doing?.

I mean, not really, likely no different than we kind of launched. Theirs is kind of set of relatively small competitors in the Yoga set, there is merely 10-15 of them. Interestingly they've priced between $13 and $20 a month, it's much less offering.

There are people -- you know, do something in a similar space very differently; so we actually had the discussion on our board and there is no really any competitors -- we would consider competitors where we will try to track what they do.

We kind of look at that and try to kind of see if something like would be there but there is nobody meaningful who would right now would say, hey, there is a competitor we need to watch it. But there is lot of small guys, especially in the Yoga side but they -- fraction of our science..

At this time this concludes our question-and-answer session. I'll now like to turn the call back over to Mr. Rysavy for closing remarks..

Thank you very much, and thanks everyone for joining. And we look forward to speaking with you when we report our annual results which will be really early March. Thank you very much..

Ladies and gentlemen, this does concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..