Good afternoon, everyone, and thank you for participating in today's Conference Call to Discuss Gaia Incorporated Financial Results for the Second Quarter ended June 30, 2019. Joining us today are Gaia's CEO, Jirka Rysavy; and CFO, Paul Tarell. Following some prepared remarks, we will 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, Karina, good afternoon, everyone. Revenue in the second quarter increased 32% to $13.2 million from $10.0 million in the year ago on 582,000 subscribers which is a 26% increase from 463,000 a year ago.

We increased the ratio between the subscribers' lifetime value to acquire subscriber to 3 to 1 from 2 to 1 during the same quarter of last year and 3 to 1 during the previous quarter.

During last six months we reduced our negative EBITDA margin from 75% to 12% and expect to reach positive EBITDA as planned by end of the next months on approximately 590,000 to 600,000 subscribers. Reaching positive EBITDA by end of September will allow us to grow in mid 20% range in the third and fourth quarter and low 30s next year.

In June, we successfully completed our first live event in the Gaia Sphere in our campus. Our soft launch in June exceeded everyone expectation. We'll do some final tweaking with our second event in August and also start with the active marketing of our $299 Live Access subscription.

For our first live event capacity of October the seats are already sold out even though we have increased the ticket price to $700 to $900 range. In June, we acquired a small video streaming service focused on Alternative Healing and Healthy Eating to boost the content offering for our U.S. segments the Alternative Healing.

We were in friendly discussion for several years and the valuation finally came to attractive range. This also helped us balance the impact of [indiscernible] from our high percentage of new members we acquired during our 65% growth period rather than spending an additional about 2 million on marketing in the quarter.

As I said, we expect to reach positive EBITDA by end of the next months and we also expect to get to positive income and free cash flow in July. At end of June, we have $17.5 million in cash and I will let Paul right now to speak more about results..

Thanks Jirka. Revenues in the second quarter increased 32% to $13.2 million compared to the year ago quarter due to subscriber growth of 26% over the same period ending the quarter with 582,200 paying subscribers.

The effect of our price increase for new monthly subscribers to $11.99 in January helps lift to average revenue per sub to $7.67 in the second quarter compared to the roughly $7.50 range we ran for the prior three quarters.

As a reminder existing monthly subscribers prior to the price change are grandfathered in their current pricing of $9.95 a month until their first renewal in January 2020.

Gross profit in the first quarter increased to $11.4 million from $8.7 million in the year ago quarter with a slight decrease in gross margins to 86.4% compared to 87.1% in the year ago quarter. The decrease is primarily driven by increased content amortization due to our increasing content spending over the past few quarters.

This increase includes content that is being created with the new host we've attracted to our platform with our live Gaia Sphere offering. As part of the agreement to host a weekend seminar, each host is also producing an episodic series that will be available to all subscribers.

We intend to utilize this new content to attract new and existing subscribers to upgrade to our $299 Live Access annual membership or attend an event in person. With the conference late coming in the second half the year, we expect gross margins to maintain at this level for the remainder of the year.

With the soft launch of the Gaia Sphere in June, we limited tickets to 125 people to ensure a smooth inaugural event. We received great feedback from attendees both on their experience during the event and Gaia overall. We have incorporated learnings from this event and are preparing for our next event which will be August 16 through the 18.

We are planning on a slightly larger audience for this event as we continue to test seating configurations. Our first full capacity event will be in October and as Jirka mentioned is already sold out. The only way for additional people to access this content will be with a Live Access annual subscription.

Operating expenses excluding marketing and subscriber acquisition costs in the first quarter were $6.7 million. We slowed hiring in 2019 given our focus on EBITDA profitability by the end of September.

Our gross profit per employee has maintained at $313,000 for Q2 which is consistent with Q1 of 2019 but is up significantly from $254,000 level in Q2, 2018. Total subscriber acquisition costs were $7.5 million or 57% of revenues. This is down significantly from 125% and 120% in the third and fourth quarters of 2018 respectively.

We have continued our focus on adding higher lifetime value subscribers which represented over 80% of the subscriber additions for the fourth quarter in a row.

As Jirka mentioned, we've been focusing on increasing our target LTV to CPA ratio this year with our target of 3.5 to 1 being achieved a quarter early bringing the average CPA down for the quarter to $77.

The impact of losses from our 65% plus growth periods on 2019 has been slightly larger than we originally projected, but we're starting to see improvements in the monthly retention of these cohorts as they continue to mature in tenure. As Jirka mentioned, we completed a small acquisition in June.

We acquired approximately 40,000 paying subscribers from SMTV. Over 35% of these subscribers have already reached the critical subscriber tenure of two plus years. These subscribers will now have access to our significantly more robust content catalog and product experience.

By having these season subscribers in at this time, we’re able to reduce the amount of cash spent on marketing to add new subscribers in the second as well as the third quarters as Jirka mentioned.

We continue to build on our member-driven growth focus and have begun releasing new sharing functionality to our existing members as part of bringing our member referral program up to scale. All this is started from a relatively small number, the impact of these new sharing features has shown meaningful improvements in engagement and conversion.

We expect this program to help further reduce CPA and increase engagement going into Q3 and beyond, combined with a new content lineup from our new talent and our Live Access offering, we expect people to bring average revenue per subs up meaningfully over the next 12 to 18 months with modest increases in the absolute dollars we allocate the subscriber acquisition costs.

This will allow us to continue to build on a cash flow generation power this model at lower subscribers than we originally expected. We’ve made meaningful progress on our path to becoming EBITDA positive over the past six months, reducing our EBITDA margins from negative 75% in the fourth quarter 2018 to negative 12% in the second quarter of 2019.

We are well on our way to crossing over to sustainable positive EBITDA by the end of this September, which is anticipated as a subscriber level of 590,000 to 600,000. With our negative working capital model, once we achieve positive EBITDA, we were able to start generating cash flows from operations.

We will get a further cash flow left in January, when our subscribers grandfathered at the legacy pricing for new at new rate.

We expect cash utilization to significantly reduce in the fourth quarter of 2019 and at the first half of 2020 and expect to begin generating free cash flows as we enter the second half of 2020.With our current cash balance of $17.5 million, continued discipline on expense management, the moderation of losses from our subscriber cohorts acquired during the higher growth periods.

An early traction from Live Access, we're comfortable with our ability to get to a sustain free cash flows with 30% revenue growth with our current liquidity. With that, I would like to open the call up for questions.

Operator?.

[Operator Instructions] And we’ll take our first question from Mark Argento with Lake Street Capital Markets. Please go ahead..

I was just wondering to drill down a little bit on EBITDA positive and cash flow positive.

So Paul, could you just again just kind of walk us through what are some of the key leverage you’re pushing and pulling in terms of being able to get the EBITDA positive here by the end of the months and then from a total free cash flow perspective and maybe talk about what free cash flow positive looks like relative to CapEx, you capitals spend back in for content or developing under the Live Access programming?.

So just to clarify, by the end of September that we're shooting to get the EBITDA positive.

The biggest lever that we pulled obviously has been the marketing spend and what we’re allocating to drive growth and Jirka alluded to in his prepared remarks that the growth rate that we’re going to be able to sustain into the second half of the year is a little lower than we had originally expected but that's because we're focusing on the discipline of giving - getting EBITDA profitability.

The second big lever that isn’t really elaborates more of a natural rate of change as we slow the growth rate down, the need for growing our employee based is also reduced, so we’re able to contain our salary expenses and what the two of those things we’re able to take 80% to 85% of the route that we need to get there into account.

And then the third piece that's coming into the fall will be us adjusting our platform and streaming costs relative to the new subscriber run rates that we’re at.

The prior year we lock in rates for the higher growth periods and so we’ve been in currently expensive at that level but now as we go into the fall with our new subscriber levels we’re able to take an additional bite out of our technology costs as we look at bridging the EBITDA profitability for Q4..

That’s helpful. And just one thought…..

Go ahead..

Obviously you’ve given some pretty decent interest in the live - for Live Access program and any thought about turning that into more of a subscription or taking some of the content.

It seems like your subscribers remain thirsty for what you guys are offering, so any thoughts on even like super tier $50 month offering or something that’s subscription but maybe up a notch or two?.

I mean, that’s what the intent of the $299 Live Access annual subscription is meant to give people access to that content both during the weekend events on alive basis but also then going forward. And actually on our first event, we mentioned we had a 125 people in the audience.

I think we had about a 98% or 99% conversion of the people that bought the ticket that actually signed up for the subscription offering during that event. And so that's how I originally expected it to go, as people would come to the event and then want to sign up.

But now as we’re going with the incremental slate, the content is actually starting to standalones, we’re able to market the 299 subscription independent of individual events..

Mark, your collection is can we start another high-level subscription. We had some discussion but we don't - we plan to do anything at that level for next still we get free cash flow and positive P&L. But we expect to reach next July.

Our focus will be on there and then as I said, we kind of grow above mid-20% for next two quarter and then kind of low 30s next year to be able to achieve the goals to both get EBITDA positive in the fourth quarter and then positive P&L and cash flow in third quarter of next year..

Yes and then just one quick follow-up. Have you got - obviously subscription, streaming has become immensely popular but seems like the max like here is app supported, any thoughts on doing some app supported programming color to leverage the content, that’s it for me. Thanks..

We talked about it. We talk about it in the case. It's not something what we kind of what not like to do today, we do not have to do it to get to positive P&L. So I think, as I said our first really positive P&L its obviously an option for the future but for right for this year we don't plan to do anything on that..

We’ll take our next question from Eric Wold with B. Riley. Please go ahead..

Paul, maybe just spend a couple of minutes on or your thoughts on spending on content, as you shift the priority interest of the title subscribers and now you think you're going more towards Alternative Healing, how is that changes any needs around content and then can you remind us what your plan content spend is this year than how much that would need to grow next year support a 30% revenue growth?.

Yes. So I think over the last trailing 12 months we’re roughly at about 8 million spend level on content. We're looking at over the next 12 months somewhere in the $10 million to $11 million range as we go forward.

It’s just really about the balance of where we’re spending that content with the host that we have with the Live Access show, they are all committed to doing at least a 13 episode series with us. So we have a lot of new content coming from that.

It’s obviously being subsidized by the live event ticket revenue to get a lot of bang for our buck with that. And then it’s just about supplementary filling in the catalog to make sure that we have the pieces of content that we need to bridge all of the existing library of content.

That’s one of values of having the original content the way that we have is its not going to go away. So we’re able to look at viewership and interesting topics and then supplemental our content catalog with relatively affordable in-house productions and you don't have to go out and spend a ton of money per hour to keep compete with everyone else.

But that's really where we’re at right now. So Mark asked the question I didn’t get to which was what if we need to bridge for the free cash flow.

So I think it's really that $10 million to $11 million of content spend that it’s the investing side of the P&L is really what we're looking to close the gap on in the first six months to next before we can start generating cash flows..

Also I would like to say for the 11 million, the way how you look at content is for mostly like the out-of-pocket expense and we don’t charge to studios and the cameras and the people on certain level with their own salaries. So can’t compare to number of the things what studio kind of putting up there for us.

For example if we did something for PBS in the past that $125,000 and now we kind of spend for us it was like more like 50. Because we owned the difference and obviously reasonable up-charge like Netflix would pay to host our studio.

So I just kind of say that - you have to look it's probably less than half what would be if you kind of go in the market..

And the episodic commitment over what period of time are those produced?.

We’re actually been filming that as we speak, because the intent is to get those series out so there are our existing members can get exposed to the talent and then give us a pool to selectively market the tickets and Live Access subscriptions to. So Gregg was our first one and we had a lot of content with them.

The one that's coming up in August, we just launched her show a couple weeks ago. And then the October host show should be coming in early September I believe..

All the people they would be live it’s already felt this year..

And final question from me, of the 582,000 subscribers how many of those are trying to still on the - lower monthly rate?.

I mean back to the grandfather, I don't have that number off the top my head Eric will have to follow up with you on that one..

[Operator Instructions] We’ll take our next question from Darren Aftahi with ROTH Capital Partners. Please go ahead..

This is Dillon Heslin on for Darren, thanks for taking my questions. First on the acquisition can you sort of differentiate between the acquired subs and how sort of your core Gaia base of service was doing in the quarter. And then given that I think you mentioned like 35% of those are pass the key orders.

What are the some of your expectations for further remaining as you go forward?.

I am not sure I totally understand the questions but roughly as I kind of said if you want to stay on the course without doing acquisition we had to spend about additional 2 million in marketing to be in kind of pace what we kind we said. So if that’s how you’re going to look at it otherwise if you say what we actually.

If you look at value of those subscribers so I said today for the new subscribers we pay about 3.5 to 1 LTV to CPA. For these members which are like third of them is more than two years so they obviously have a higher value we pay almost exactly what we pay a year ago was actual less than 2 to 1 to our current LTV CPA.

And Jirka you are answering your question..

Yes, in terms of the retentions on the acquired subs the fit of their content library into our content library and the access of those subscribers will now have.

We expect them to behave better than what we would get if we just went out and acquired new subscribers because we know that they already have an affinity for our space and an interest in our content areas.

I don't want to provide specific guidance on what we expect to get more attention perspective, but this is one of those build versus buy analysis that Jirka and I have run through over the years. And it clearly tipped into the buy side based on the valuation that were able to do this deal at..

Yes, so this is very kind of really what we called bill to buy because we buy let’s say about 2% of our subs from balance sheet and subscribers let’s call it 6.5%. So it's very small so it's clearly the acquisition price is to be attractive for us to make sense to do it.

We were discussion which actually for about three years over time and the things has changed and also the attractiveness of the content and the old subscribers were.

Because we launched when we launch our Alternative Healing about a year ago we had in mind to make this acquisition at one point to boost our content rather than build or we had before already like 900 titles but now they definitely help us to be robust.

And so we would like to bring Alternative Healing kind of same level as our channels our segment are..

And then sort of are you seeing anything on the subscriber acquisition side at all with some any sort of price sensitivity given your price increase or they continue to be pretty insensitive I mean given that you had such strong demand for the live events as well.

Just wondering sort of what your take is there?.

Yes, I think there is two pieces to that question one is what the cost of the media that were advertising against. When we seen that increase in cost as there is more demand for less impressions but what we've been able to do by bringing the growth rate down. It will be very targeted in the audiences that we’re going after.

So the conversion rate increase that were able to get because of that target allows us to offset those two things. So I would say that we haven't seen any meaningful impact in terms of price sensitivity at the lower volume that were bringing in with the lower growth rate.

Now if we continue going at the higher growth rate I don't know that I would've been able to make that same statement, but it has worked out well with the combination of the two for us going into 2019..

Yes actually the net CPA decrease and we plan to keep our decreasing as going forward as well same as our LTV increasing because our focusing on higher value subscribers..

And we’ll take our next question from Peter Rabover with Artko Capital. Please go ahead..

So Paul I wanted to ask question on, so what percent of your total subscribers right now are in that 3.5 to 1 LTV. And I guess more like on the color of I don’t if there is quantifiable way to do it, but I know you’re going from a higher growth lower LTV to positive acquisition subscribers to lower growth higher LTV customers this year.

So you’re kind of getting a double whammy this year so I was kind of curious what you could quantify that and how that shaped out in the next 12 months?.

Yes, so I think the first thing is on the basis with which we are doing our calculation. It's actually a blended average of the entire member base based on recent history. So it's effectively a weighted average based on all of the factors the tenure of the member base as well as the content vertical that they fall into.

Jirka and I have actually been talking about how do we make this calculation more approachable and available to people. So I’d say stay tuned on mechanics of the calculation so complex to walk through on the phone.

But in terms of how we expect that to increase over time we’re going to get the benefit of two things one, the size of the mature subscriber base as they continue to age is going to get bigger. And the impact of new subscribers is going to diminish so in effect we’re increasing the tail part of the retention curve just as a function of time.

And so, we expect that to naturally improve from there and as long as we continue to stay disciplined and how we acquire new subscribers and make sure that they season at the same rate we should expect to see continued improvement from here independent of anything that we do with pricing..

What do you think the long-term run rate of that LTV - what their new strategy is?.

Well I mean - it’s actually it’s our discussion here internally how far what’s really we want to kind of get there because we have clearly to actually two things like everything what Paul said you know what’s kind of driving the increase.

I think the main what you see is to focusing on the higher value subscribers which there were like less than half a year ago it's right now like two-thirds. So the subscribers so we consider higher value close to two-thirds we would call it 60%.

But so that's probably the biggest driver there, because the LTV is changing also as we kind of acquire more quality, let's say, yogis, yoga LTV increases as well as LTV.

And that separate from us we increased our price because we still have - all the people who we had last year they grandfathers and they will be till the - first renewal in 2020, which also start to increase LTV when they start to pay higher price. So we’re pretty bullish on that one but same time we want to also lower our cost per acquisitions.

So we get to the 3.121 actually a quarter early than we planned than I would kind of we didn't have really put any official target to it, but I think we would kind of will start to 4 to 1 range next year because it's doable. And so there's definitely quiet room in both of those measures..

And then maybe like another quantifiable question, but I'd love to get color.

So you have the Alternative Healing channel for about a year and so maybe if you could - do you have any idea of how that’s contributed to the overall growth and what’s been the uptake I guess, sort of the response to that channel and yes, any color you can give on that it will be great..

Well, I can tell you it's right now as we spent about 14% our base, so they probably answer some of your questions. You know, that’s - you know, it was slightly was like half of the titles even last and we have another thing.

So it's like the slow acquisition will help us to do, because we get more content that side and you know I think we would like to be although segments to kind of be not different but it's - as we go, but again we will see it what the LTV is and that's too early to really calculate LTV with any predictability.

So we would still create LTV in a kind of what we call for the Alternative Healing on the kind of lower side of the spectrum.

Our transformation on the other side it’s kind of matured, LTV kind of increased very nicely and so we expect to be the same robust Alternative Healing, but again, stuff like that we can - I can kind of announce a year from now but it’s a channel what I think has a lot of potential but we didn't have still now quite of content to really push it.

Now we do..

And then I am sorry take up your time but I just had like one more question.

You’ve been obviously at this for three to four years of growing customers and I'm curious whether you have a good idea that you could share, the metrics of some of your customers like middle-class or you know average salary or something that kind of you can hang your hat on to just to understand what type of customers that you are getting and whether you have a better idea of what they are now?.

Well, I mean, it is so different, especially as we kind of you know whisper geographically and so we generally the average income is about twice the country average. Those are U.S. statistics.

We don't have yet really try to run something robust worldwide but generally I would say that the positive segments lay between 50% and 65% females, so it’s is definitely females skewed out but most of the people - most of the stuff when you pay by credit cards that way doesn't mean the users are but because all we have access to who pay which group does pay.

All is we do is survey, and we did some statistic how many own home and stuff but I'm not frankly see that that the data had $12 prize, we find that that means significantly they owned the home or not.

So everything comes probably only one, what we kind of get and we kind of get in a range of the age, which is pretty spread from about 27 to 165,there is not that much difference. Its drops before 27 and drops about 65. But we’re planning to actually do a new study for that but so far what we did it was pretty consistent..

On the marketing side we’re definitely seeing interest in the younger demographics, they just would rather watch free content and be exposed to ads and pay for the subscription. So that’s part of the growth into the future is getting them aware now so that when they're ready to pay for their time they will be coming off.

And then what’s the split in your growth from international and domestic, has that been pretty consistent or has one than the other one country that just like you know, been going in something any color on that would be great?.

Yes, I’d say obviously, our English offering is much more robust. So anything that’s English is going to exceed the other ones from a non-U.S. perspective that Australia, New Zealand, the United Kingdom's actually quite interesting with one of our new host who has the following over there, Canada.

And then in terms of non-English, Spanish is the area that we have the most robust catalog but there's also a large demographic of Spanish speakers that the price becomes a bit of a blocker for German, small library but very passionate people.

I mentioned at member referral program we had one person in Germany that was sharing German content actually drove about 250 people to our site for a very small offering that we had that was German language only. We obviously have dubbed and subtitled stuff but this is around an original German piece of content..

Australia and New Zealand are our best per capital better that any U.S.

I think in the future German is probably, our German-speaking is probably one of the growth where will come after you know together which is Spanish, I think that will be the first like non-English drivers, but for today for 30% growth in the international's kind of there we want to nurture it but you don't really need any of that to grow 31%..

And then I know you have mentioned it but between 70 million in cash plus you have some mortgage on the building and you got 12 months between now and when you said you expected you’re free cash flow positive and I assume you’re feeling pretty confident but that's enough to get you to that bridge?.

Yes, we always kind of believe that is that they didn’t change and it's kind of about to a less than 12 months right now and because we build - make it a big jump in the 1Q.So we have kind of with a long quarter of low higher spend and after that it's not, you would see from the numbers..

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 everyone for joining and we look forward to speak with you when we will report our third quarter in early November. Thank you very much..

Ladies and gentlemen, this does conclude today’s teleconference. You may now disconnect at this time. Thank you for your participation..