GAIA - Gaiam Inc.

[spartansaver]

Recently Purchased a small amount of GAIA. The company is a 150M Market Cap with about 15M in cash and no debt

 

-Operates through two divisions Yoga equipment and apparel and Gaiam TV

 

-The yoga equipment and apparel division is the main part of this story. They make all the yoga equipment you can dream of and if you go on Amazon they get fairly decent reviews averaging around 4 stars. They have plenty of avenues for growth and have recently opened at kohl's with better than expected sales and are testing in sporting good outlets such as Dick's. As of this past year it posted a small profit, but this profit was masked by the large amount of cash being put into the TV segment. The yoga division has been growing at a nice pace of around 12% for the past few years and would have been a bit higher if not for some one off ordeals this past year. The division generated profits of around 2M in 2014. Going forward if one assumes a reasonable growth rate as well as SG&A going down to around 30% as the company scales and margins remaining stable at 41-42% I could see this as being worth double the current price. It is a hefty price to pay for 2M in earnings, but it seems to be a GARP situation.

 

-The TV segment is a yoga streaming service that requires a monthly subscription to watch all of the yoga and spiritual programming one can handle. The tv has okay reviews and the main complaint seems to be the 10$ monthly price tag. As of the most recent K it had around 10M in sales and the company projects that it will reach profitability at some point in 2015. They have stated they they expect a growth rate of around 50% in the next year. This is simply a nice option on a business that may be a grand slam or go bust.

 

-The value of these two separate businesses should be realized at some point over the year due to the company filing a Form 10 in Feb. with plans to spin off the TV segment.

 

The company came on my radar after reading through form 10's.

[jawn619]

Recently Purchased a small amount of GAIA. The company is a 150M Market Cap with about 15M in cash and no debt

 

-Operates through two divisions Yoga equipment and apparel and Gaiam TV

 

-The yoga equipment and apparel division is the main part of this story. They make all the yoga equipment you can dream of and if you go on Amazon they get fairly decent reviews averaging around 4 stars. They have plenty of avenues for growth and have recently opened at kohl's with better than expected sales and are testing in sporting good outlets such as Dick's. As of this past year it posted a small profit, but this profit was masked by the large amount of cash being put into the TV segment. The yoga division has been growing at a nice pace of around 12% for the past few years and would have been a bit higher if not for some one off ordeals this past year. The division generated profits of around 2M in 2014. Going forward if one assumes a reasonable growth rate as well as SG&A going down to around 30% as the company scales and margins remaining stable at 41-42% I could see this as being worth double the current price. It is a hefty price to pay for 2M in earnings, but it seems to be a GARP situation.

 

-The TV segment is a yoga streaming service that requires a monthly subscription to watch all of the yoga and spiritual programming one can handle. The tv has okay reviews and the main complaint seems to be the 10$ monthly price tag. As of the most recent K it had around 15M in sales and the company projects that it will reach profitability at some point in 2015. They have stated they they expect a growth rate of around 50% in the next year. This is simply a nice option on a business that may be a grand slam or go bust.

 

-The value of these two separate businesses should be realized at some point over the year due to the company filing a Form 10 in Feb. with plans to spin off the TV segment.

 

The company came on my radar after reading through form 10's.

 

Thanks for the writeup/explanation. I saw this through a screen but ignored it because of the negative operating results, thanks for breaking it down into segments. It's still a little expensive at this price for me, but will take a look if prices come down.

[DCG]

I don't have anything to add other than that I applied for and was offered a job there several years ago but turned it down because the pay for pretty terrible.

 

 

I'm not sure what competitive advantage they have though. Their products are mostly their logo slapped on essentially many of the same products you can get from a lot of other brands.

 

 

How are they planning on becoming profitable this year when they haven't figured out how to make a profit in the past?

[spartansaver]

I wouldn't say they have a major competitive advantage, they have a strong distribution network and they claim to have the #1 brand in yoga equipment and are expanding within apparel. There margins are not anything insane compared to other apparel brands and less than the top players.

 

As for profitability, it is hard to say how they are going to reach that although I believe it mostly has to do with the amount of subscribers that they have. I made a mistake in my write up that their most recent rev was 15M when in fact that is roughly the projected for 2015. 2012 had revenue of 3.7M, 2013 5.5M and 2014 10.1M with SG&A respectively at 9.5, 12.9 and 16.4. They will likely reach breakeven at around 20M and in their last call stated that their target was June. Whether that comes to fruition will remain to be seen, but it would definitely help the story come Q3. The margins for the TV are enormous, but it remains to be seen whether it will pan out. It could definitely be a cheap and easy acquisition down the road if a hulu or netflix wanted to expand.

[eclecticvalue]

Gaiam is a yoga company that has two divisions Gaiam Brand and Gaiam TV. Gaiam Brand markets yoga fitness accessories and apparel under the Gaiam name. Gaiam TV which produces content for yoga practitioners to do yoga in the comfort of their home.

 

Catalysts

 

1. Spin-off coming up in October 2015 to unlock value.

 

2. Both companies post spin-off could be potentially attractive to buyers. Such as Lululemon athletica, Netflix, etc.

 

This interview outlines in greater detail about the opportunity.

 

https://sumzero.com/headlines/consumers_and_retailing/GAIA/284-half-netflix-half-lululemon-gaiam-to-unlock-hidden-value-through-streaming-video-spin-off

 

 

Surprisingly I haven't heard anything about this spin-off at all. It seems intriguing given the possibilities and a value opportunity to invest in the booming yoga industry.

[spartansaver]

Wrote this up about two months ago. Gone down a bit since I first wrote up about it and not much has changed. There is another thread with same title without the comma.

[eclecticvalue]

I couldn't find the thread spartansaver.

 

One question I have is if this was acquired by Netflix or Hulu. Do you think they can charge an add-on subscription fee for Gaiam content in addition to the main subscription fee to these services. I read this in the sumzero interview. Can anyone with a subscription respond?

[KJP]

In the last few months, Gaiam has sold off its branded products and eco-travel business, completed a tender offer for about 40% of shares outstanding and renamed itself Gaia, Inc.  As a result, the company is now a fast-growing SVOD pure-play with about 170,000 subscribers paying $8-$10/month, a market cap of about $120 million, roughly $75 million in cash and no debt.  The company’s stated intention is to ramp up spending (and thus incur operating losses because all customer acquisition costs are expensed) to grow subscribers at 50%+ annually over the next few years.  If that business model interests you, please read the more detailed overview I’ve provided below and reply with any thoughts you may have on the business and its value.

 

Old Gaiam:  As of January 1, 2016, Gaiam consisted of (i) a branded yoga equipment and apparel business; (ii) majority ownership of an eco-travel business; (iii) an SVOD business focused on yoga and “conscious media”; (iv) a significant amount of NOLs; and (v) an office building in Boulder, CO that probably is worth around $20 million.  The company had no debt. 

 

Old Strategic Plan:  In 2015, Gaiam announced its intent to spin-off the SVOD business.  Historically, the SVOD business incurred significant operating losses as it spent on advertising to grow its subscriber base.  Apparently to highlight the favorable underlying economics of the SVOD, management chose in 2015 to throttle back spending in order to reach breakeven.  Management achieved its goal of breakeven in around mid-2015, but at the expense of throttled back on subscriber growth.  (I discuss the business’s growth in more detail below).  According to management, the spending associated with breakeven profitability allowed subscriber growth of about 30% per year, but they believed that 80-90% annual subscriber growth with higher advertising spend. 

 

The Plan Changes:  In May 2016, the company switched gears and sold the branded products business and the eco-travel business for $180 million in gross proceeds.  According to management, the company’s NOLs would provide a tax shield for most of the $110 million gain associated with the sales. 

 

In addition, the company announced a tender offer for up to 12 million shares or vested options at $7.75/share.  If the tender offer were fully subscribed, management estimated that the company would have about $60 million in cash after paying for the tendered shares.  Ultimately, only 9.5 million shares and 842,000 options were tendered.  As a result of the tender offer being undersubscribed, the company likely has about $15 million more than it originally projected, or about $75 million in cash.

 

Market Cap & Enterprise Value Today:  There were about 24.5 million shares outstanding before the tender, so there should now be about 15 million shares outstanding.  At $8/share, the market cap is about $120 million, and the enterprise value is about $45 million.  For that $45 million, you get (i) the SVOD business and (ii) the Boulder office building. 

 

The SVOD Business:  As I mentioned above, the SVOD business is aimed at the yoga and “conscious media” niche.  If you don’t know that “conscious media” is, you can get a feel for it by poking around the company’s website (www.gaia.com) or scrolling through GaiaTV’s offerings on Amazon Prime, where it’s available as a subscription add-on.

 

The company owns its own studio and produces 80% of the content on its streaming service.  Moreover, the self-produced content is available exclusively on the streaming service.  So, the company is also a content producer, rather than merely an aggregator of third-party content that is exposed to rising licensing costs.   

 

Historically, the SVOD business was a small piece of a much larger business, so the disclosure around its economics has not been great, though that should improve significantly now that it’s the only business left.  For the historical numbers, you have to try to piece things together from the Form 10’s for the now-abandoned spin-off, segment reporting in the company’s 10Qs and 10Ks, and commentary in the conference call transcripts. 

 

The business was launched in late 2012.  The annual reported revenues for the segment have been:

 

2013:  $5.5 million

2014:  $10.1 million

2015:  $14.2 million

 

But to get a better picture of the organic growth of the core business, I think some adjustments are necessary. 

 

First, in 2013 the company acquired My Yoga Online, but only two months of revenue from that business are included in the 2013 number.  If the business had been acquired on January 1, 2013, pro forma revenue would have been $7.7 million.  (See pg. F-14 of the original Form 10).  I think the $7.7 million is a better number to use for 2013 revenue if you’re trying to assess organic growth. 

 

Second, starting on January 1, 2015, the Boulder, CO office building was assigned to the SVOD business segment.  The building produced $1.9 million in rental revenue, which is included in the segment’s 2015 revenue number.  So, core 2015 revenue was $12.3 million, rather than $14.2 million.

 

Third, the SVOD segment includes a legacy DVD subscription business that appears to have been shrinking as the number of SVOD subscribers increases.  That is likely why revenue increases for the business have not kept up with management’s subscriber growth numbers. 

 

Here’s the revenue numbers adjusted for the issues noted above:

 

2013:  $7.7 million (no breakout between streaming and DVD)

2014:  $10.1 million ($8.2 million streaming/$1.9 million DVD)

2015:  $12.3 million ($10.8 million streaming/$1.5 million DVD)

 

Based on these adjusted numbers, the segment grew revenue by 31% in 2014 and 21% in 2015.  Looking only at streaming, revenue grew 32% in 2015. 

 

During the quarterly earnings calls in 2015, management explained that growth rates are, unsurprisingly, directly correlated with advertising spending.  Because all advertising costs are immediately expensed, pushing for greater growth will lead to short-term operating losses, because the revenue from the new subscribers is recognized over time, rather than matched with the costs of acquiring them.  Apparently in preparation for the planned spin of the SVOD business, management deliberately throttled back advertising spending to reach breakeven profitability for the business. 

 

According to management, calibrating advertising spending to breakeven profitability would result in about 30% growth.  This estimate appears to be accurate, because the segment reached breakeven around the middle of 2015 and, as discussed above, grew streaming revenue at about 30% for the year.

 

Management’s stated intention was to ramp advertising spending (and thereby incur operating losses) to push subscriber growth rates much higher than 30% following the spin off.  Now that the branded business had been sold, management appears to be implementing this plan, as the subscriber growth rate has more than doubled in 2016.  Specifically, here are the subscriber numbers that have been disclosed thus far for 2016:

 

January 1:  135,000 (See Q4 2015 earnings call transcript)

March 15:  155,000 (See Q4 2015 earnings call transcript)

May 10:  167,000 (See Q1 2016 earnings call transcript)

 

If the subscriber growth rate for the rest of the year equals the growth from Jan 1 to May 10, the company would add about 90,000 subs in 2016, which would equal 67% growth.  That’s roughly on par with management’s forecasts, which call for greater than 50% growth in 2016 and then 80% growth per year over the next three years. 

 

The bottom line is that management appears to have a good handle on how fast they can grow the business and at what cost.  To put the growth numbers in context, let’s assume that the company ends the year with 210,000 subs.  Here’s what the sub counts would in two years (year end 2018) at various growth rates and the implied run-rate revenue at $9/month/sub:

 

30% growth: 355,000/$38 million

40% growth:  411,600/$44.5 million

50% growth:  472,500/$51 million

60% growth:  537,600/$58 million

70% growth:  606,900/$65.5 million

80% growth:  680,400/$73.5 million

 

For those who think a business like this is best valued on a multiple of revenue, the key questions are whether the company can achieve these subscriber growth levels and maintain pricing.

 

To go further and estimate the profitability of the business at varying revenue levels requires significantly more work and some educated guesses about churn rates, customer acquisition costs, and stand-alone operating expenses.  If anyone is interested in this company, I’ll try to tackle those issues in a follow up post, and explain why the actions of the largest shareholder show he is quite bullish on the SVOD business.

 

[sculpin]

Thanks for the post - Peter Rabover owns GAIA in his Artko Capital fund. His recent comments in Q2 are below...

 

Gaiam (GAIA) – GAIA was also a 10% position in the portfolio for us this year, and it has appreciated

approximately 20% due to its announced transaction in 2nd calendar quarter of 2016. While we were

patiently waiting for the announced spin off of the streaming yoga TV business to materialize this

year, the company decided to go in a different direction by selling the brand and travel businesses for

$180 million or $7.20 per share. While we always valued those businesses between $150 million to

$200 million, we were pleasantly surprised by the deal. However, we’re more excited about what the

company is going to look like post-transaction. In July 2016, management completed a tender offer

of $7.75 per share for approximately 40% of the outstanding shares, which left the company with over

$7.00 per share in cash and real estate and only 75 cents for the streaming yoga TV business which

we estimate to be worth between $7.50 to $15 per share in the next few years. The business has a

7,000+ title library with close to 170,000 global subscribers expected to grow 80% a year for the next

few years. This will drain some of the cash from the balance sheet, but we think investing in a high recurring

cash flow customer base with very low content creation costs makes tremendous economic

sense and a longer term subscriber base of close to 1 million should be very attractive to a bigger

media company.

 

[KJP]

That's the investment case in a nutshell. 

 

What he doesn't discuss, though, and what is the trickiest part of the investment case is whether a subscriber's lifetime value significantly exceeds the company's customer acquisition cost, i.e., whether the company's plan to spend its cash is going to create rather than destroy value.  It's hard to assess that because, as far as I know, the company doesn't disclose churn rates.

 

Rabover's statement that the SVOD business will be worth $7.50 - $15 makes clear that he thinks growth would create a lot of value, but I'd love to know whether he's basing that on a likely acquisition multiple based on projected revenue or an analysis of the company's likely profitability as a standalone business. 

[namo]

To go further and estimate the profitability of the business at varying revenue levels requires significantly more work and some educated guesses about churn rates, customer acquisition costs, and stand-alone operating expenses.  If anyone is interested in this company, I’ll try to tackle those issues in a follow up post, and explain why the actions of the largest shareholder show he is quite bullish on the SVOD business.

Thanks for the write-up! I'm quite interested.

 

I'm also wondering about the addressable market, and whether competitors could undercut them?

[jawn619]

Thanks for the write ups and info. The growth is interesting, as well as the seemingly low valuation. Companies growing this quickly usually aren't valued at 1x sales.

 

I do have some questions and concerns that I'd like to share.

 

Question: On their most recent 10-Q i see that the only has about $11M in cash, where did they get the $75M to do the tender offer?

 

Concerns:

1. I am bearish on their SVOD segment. I think yoga is more of a class/in person activity. To me it seems the content seems like an unproven venture that is currently losing money.

2. I'm not familiar with the brand, so I'm not sure in the long term they really have a competitive advantage. Lululemon is already dominant and there will only be more and more competition in this segment. Their current margin profile is abysmal. $13M contribution margin off $175M of revenue is a less than 8% contribution margin BEFORE SG&A. The company seems to be experiencing some operating leverage, but I wouldn't want to bank on it going forward.

3. Reliance on target/kohls is a negative.

 

Summary: I know part of the thesis is that it could get bought out but as time goes on I think Gaiam's products will be commoditized. Without a competitive advantage growth doesn't add value and it doesn't seem attractive on a standalone basis.

[namo]

@jawn: the apparel/retail division was sold for about 150 M$ in after-tax proceeds. Hence the cash, and hence why Lululemon is not really a competitot anymore (or do they do yogo classes/videos?).

[KJP]

Question: On their most recent 10-Q i see that the only has about $11M in cash, where did they get the $75M to do the tender offer?

The cash for the tender came from the sale of the branded and eco-travel businesses, which occurred after March 31, so they aren't reflected in the financial statements in the latest 10Q.  They are, however, described in that document.

 

Concerns:

1. I am bearish on their SVOD segment. I think yoga is more of a class/in person activity. To me it seems the content seems like an unproven venture that is currently losing money.

2. I'm not familiar with the brand, so I'm not sure in the long term they really have a competitive advantage. Lululemon is already dominant and there will only be more and more competition in this segment. Their current margin profile is abysmal. $13M contribution margin off $175M of revenue is a less than 8% contribution margin BEFORE SG&A. The company seems to be experiencing some operating leverage, but I wouldn't want to bank on it going forward.

3. Reliance on target/kohls is a negative.

 

 

If you don't like the SVOD business, then this investment is not for you, since it's the only business left at the company.  I'd like to hear more about why you think spending on the SVOD business ultimately will destroy value.  Is that based on your view that yoga is exclusively a "class/in-person" activity?

 

Your second and third concerns are no longer relevant because they relate to the business that has been sold.

[jawn619]

Question: On their most recent 10-Q i see that the only has about $11M in cash, where did they get the $75M to do the tender offer?

The cash for the tender came from the sale of the branded and eco-travel businesses, which occurred after March 31, so they aren't reflected in the financial statements in the latest 10Q.  They are, however, described in that document.

 

Concerns:

1. I am bearish on their SVOD segment. I think yoga is more of a class/in person activity. To me it seems the content seems like an unproven venture that is currently losing money.

2. I'm not familiar with the brand, so I'm not sure in the long term they really have a competitive advantage. Lululemon is already dominant and there will only be more and more competition in this segment. Their current margin profile is abysmal. $13M contribution margin off $175M of revenue is a less than 8% contribution margin BEFORE SG&A. The company seems to be experiencing some operating leverage, but I wouldn't want to bank on it going forward.

3. Reliance on target/kohls is a negative.

 

 

If you don't like the SVOD business, then this investment is not for you, since it's the only business left at the company.  I'd like to hear more about why you think spending on the SVOD business ultimately will destroy value.  Is that based on your view that yoga is exclusively a "class/in-person" activity?

 

Your second and third concerns are no longer relevant because they relate to the business that has been sold.

 

Thanks for the clarification. Maybe bearish is too strong of a word. I meant to say that I don't know much about the streaming video market, and even less about Yoga. If I had to guess i would say that the main practitioners lean more towards classes because it is more of an experience than something you can do by yourself with videos. This is evident in the success of classpass/peleton/other in person fitness classes.  Maybe at $5 it had more margin of safety, but at current prices, you're paying over 3x EV/Sales for a SVOD business. at 3x EV/Sales you can get better businesses with similar growth profiles but probably more visibility of revenues/competitive advantage/less need for reinvestment.

[KJP]

 

I'm also wondering about the addressable market, and whether competitors could undercut them?

 

Competition could be an issue.  Although Gaia produces the vast majority of its streaming content, I'm not confident that their programming is unique enough to create a real competitive advantage.  Instead, I suspect any real advantage must come from scale within the niche of yoga/conscious media.  If you can get a critical mass of subscribers in that niche, then you can amortize your content costs over a much bigger revenue pool.  At that point, you can make good profits at lower price points, making it very difficult for new entrants to compete with you.     

 

I have not seen good data on what the potential addressable market is.  In fact, I'm not sure anyone knows, because this may be a relatively new offering and may be, in part, creating its own market.  Also, this may be a case where a smaller addressable market is better for a relatively small first-mover like Gaia.  For example, it'll be much easier for a company of Gaia's size to grab a higher percentage of the market if the TAM is 5-10 million people worldwide, as opposed to 100-200 million. 

[KJP]

[A]t current prices, you're paying over 3x EV/Sales for a SVOD business.

 

Why do you believe you're currently paying 3x EV/Sales for the SVOD business?  I put EV at $45 million, and that includes a building worth $20 million.  So, I put the SVOD business at roughly $25 million.  Gaia currently has about 175,000 subs (last report was 167,000 on 5/10/16).  If they're paying on average $9/month/sub, that gives you an annualized run-rate of about $19 million.  Putting current EV/Sales at 1.3x.  To get to 1x EV/Sales at $9/month/sub, they need 230,000 subs, which they should hit within 12 months. 

 

In short, I'm not sure that EV/Sales is the right metric to use here, but I don't think it's accurate to say the SVOD business is currently being valued at 3x EV/Sales.

 

3x EV/Sales you can get better businesses with similar growth profiles but probably more visibility of revenues/competitive advantage/less need for reinvestment.

 

I'm always looking for more great companies to learn about.  If the current number for Gaia is about 1.3x EV/Sales, rather than 3x, do you know of many companies that match the criteria you mentioned?

 

[jawn619]

[A]t current prices, you're paying over 3x EV/Sales for a SVOD business.

 

Why do you believe you're currently paying 3x EV/Sales for the SVOD business?  I put EV at $45 million, and that includes a building worth $20 million.  So, I put the SVOD business at roughly $25 million.  Gaia currently has about 175,000 subs (last report was 167,000 on 5/10/16).  If they're paying on average $9/month/sub, that gives you an annualized run-rate of about $19 million.  Putting current EV/Sales at 1.3x.  To get to 1x EV/Sales at $9/month/sub, they need 230,000 subs, which they should hit within 12 months. 

 

In short, I'm not sure that EV/Sales is the right metric to use here, but I don't think it's accurate to say the SVOD business is currently being valued at 3x EV/Sales.

 

3x EV/Sales you can get better businesses with similar growth profiles but probably more visibility of revenues/competitive advantage/less need for reinvestment.

 

I'm always looking for more great companies to learn about.  If the current number for Gaia is about 1.3x EV/Sales, rather than 3x, do you know of many companies that match the criteria you mentioned?

 

How did you get $20M for the value of the building?

 

I'm not familiar with the SVOD space, but there are a lot of these smaller companies growing at 15-20% that are not profitable trading around 1.3x EV/Sales. FUEL trades at .2x sales. Not really comparing apples to apples but I think it shows that companies growing but not profitable probably have a downside valuation of .25-.5 EV/sales

[KJP]

 

How did you get $20M for the value of the building?

 

I'm not familiar with the SVOD space, but there are a lot of these smaller companies growing at 15-20% that are not profitable trading around 1.3x EV/Sales. FUEL trades at .2x sales. Not really comparing apples to apples but I think it shows that companies growing but not profitable probably have a downside valuation of .25-.5 EV/sales

 

Regarding the building, I don't have my notes handy but I believe management mentioned a $20 million value on one of the conference calls.  Additional data points:

 

1) At the time the building was assigned to the SVOD segment, I believe it had a book value of around $18 million, and that already included some depreciation.

 

2) In 2015, the SVOD segment recorded $1.9 million in rental revenue related to the portions of the building it did not occupy, and the bulk of that was from third parties that presumably negotiated arms' length leases.  Prior to 2015, the SVOD segment had been allocated a rental expense of about $500,000/year.  So, total annual rent for the building appears to be somewhere between $2 - $2.5 million.  I haven't seen any disclosure regarding the operating expenses related to the building, so I don't know the exact historical NOI.  But based on the figures above, management's $20 million estimate seems reasonable, and may actually be conservative. 

 

Regarding the multiple, this company is growing much faster than 15%-20%, so it should get a premium, so long as the growth is adding value.  In a separate post, I'll try to explain why I think the growth is creating value, but I'd be interesting in any thoughts about why the spending is destroying value.

 

Finally, is the company "not profitable"?  I realize that this isn't the place for a lengthy discussion of GAAP vs. real world economics, but I think it's fair to say that GAAP doesn't always capture real underlying economics.  I think that's particularly true with respect to what can and cannot be capitalized.  It may make good sense for GAAP to not permit the capitalization of R&D, customer acquisition costs and the like, because it's too hard to audit the figures and test for impairments, and thus there's too much room for management manipulation and fraud.  But that doesn't mean there aren't many instances in which those types of expenditures create real value that isn't captured either on the balance sheet or the P&L statement.  These are just general observations, though, and you're certainly right that the SVOD business currently isn't profitable on a GAAP (or pure cash flow) basis and likely won't be for the next several years.

[jawn619]

Thanks for the clarification. Will do more work on this.

[KJP]

 

I'm also wondering about the addressable market, and whether competitors could undercut them?

 

Competition could be an issue.  Although Gaia produces the vast majority of its streaming content, I'm not confident that their programming is unique enough to create a real competitive advantage.  Instead, I suspect any real advantage must come from scale within the niche of yoga/conscious media.  If you can get a critical mass of subscribers in that niche, then you can amortize your content costs over a much bigger revenue pool.  At that point, you can make good profits at lower price points, making it very difficult for new entrants to compete with you.     

 

I have not seen good data on what the potential addressable market is.  In fact, I'm not sure anyone knows, because this may be a relatively new offering and may be, in part, creating its own market.  Also, this may be a case where a smaller addressable market is better for a relatively small first-mover like Gaia.  For example, it'll be much easier for a company of Gaia's size to grab a higher percentage of the market if the TAM is 5-10 million people worldwide, as opposed to 100-200 million.

 

Namo,

 

Following up on your question about potential competition, there already are a several competitors that offer streaming yoga classes and that claim to have large (and growing) yoga video libraries.  Here are some examples:

 

YogaGlo (www.yogaglo.com):  $18/month

YogaVibes (www.yogavibes.com):  $20/month or $200/year

Yogis Anonymous (www.yogisanonymous.com):  $150/year

My Yoga Works (www.myyogaworks.com):  $15/month

Udaya (www.udaya.com):  $12/month

 

In some cases, adding to the video library of these companies can involve little more than recording a yoga class that is happening anyway in a gym or yoga studio.  It appears that this type of content is so cheap to produce that I doubt that any company can create a competitive advantage simply from the volume of yoga videos they have in their library.  Instead, if there is a competitive advantage to be had, I suspect it will have to come from scale or a differentiated offering.

 

I think Gaia is trying to do both.  They are spending significant (and growing) amounts on sales & marketing to grow the subscriber base.  In theory, greater scale should enable even more efficient advertising and allow them to offer lower prices.  In fact, they already charge less ($10/ month or $95/year) than the competitors listed above. 

 

With respect to content, Gaia offers much more than just yoga videos.  Check out their website to see what I mean.  But I don't know whether people subscribe for that other content, or whether it's simply filler.  It would be great to see a breakdown of the amount of time subscribers spend viewing the various types of content categories, but the company does not disclose that information. 

 

 

[KJP]

 

How did you get $20M for the value of the building?

 

I'm not familiar with the SVOD space, but there are a lot of these smaller companies growing at 15-20% that are not profitable trading around 1.3x EV/Sales. FUEL trades at .2x sales. Not really comparing apples to apples but I think it shows that companies growing but not profitable probably have a downside valuation of .25-.5 EV/sales

 

Regarding the building, I don't have my notes handy but I believe management mentioned a $20 million value on one of the conference calls.  Additional data points:

 

1) At the time the building was assigned to the SVOD segment, I believe it had a book value of around $18 million, and that already included some depreciation.

 

2) In 2015, the SVOD segment recorded $1.9 million in rental revenue related to the portions of the building it did not occupy, and the bulk of that was from third parties that presumably negotiated arms' length leases.  Prior to 2015, the SVOD segment had been allocated a rental expense of about $500,000/year.  So, total annual rent for the building appears to be somewhere between $2 - $2.5 million.  I haven't seen any disclosure regarding the operating expenses related to the building, so I don't know the exact historical NOI.  But based on the figures above, management's $20 million estimate seems reasonable, and may actually be conservative. 

 

Regarding the multiple, this company is growing much faster than 15%-20%, so it should get a premium, so long as the growth is adding value.  In a separate post, I'll try to explain why I think the growth is creating value, but I'd be interesting in any thoughts about why the spending is destroying value.

 

Finally, is the company "not profitable"?  I realize that this isn't the place for a lengthy discussion of GAAP vs. real world economics, but I think it's fair to say that GAAP doesn't always capture real underlying economics.  I think that's particularly true with respect to what can and cannot be capitalized.  It may make good sense for GAAP to not permit the capitalization of R&D, customer acquisition costs and the like, because it's too hard to audit the figures and test for impairments, and thus there's too much room for management manipulation and fraud.  But that doesn't mean there aren't many instances in which those types of expenditures create real value that isn't captured either on the balance sheet or the P&L statement.  These are just general observations, though, and you're certainly right that the SVOD business currently isn't profitable on a GAAP (or pure cash flow) basis and likely won't be for the next several years.

 

Regarding the building, it was purchased in 2008 for $19 million.  See page 25 of the 2008 10-K, available here:  https://www.sec.gov/Archives/edgar/data/1089872/000110465909017592/a09-1566_110k.htm

[SnarkyPuppy]

Has anyone looked into figuring out subscriber churn rate/cost per customer acquisition?

[KJP]

Has anyone looked into figuring out subscriber churn rate/cost per customer acquisition?

 

As far as I know, churn rates are not disclosed.  I believe you can try to estimate them from some sparse earnings call commentary about customer acquisition costs, lifetime value and contribution margin, but you'll only get a rough estimate at best. 

 

Annual spending on advertising has been disclosed, but I don't believe they have disclosed a fully loaded customer acquisition cost.

[Foreign Tuffett]

I signed up over the weekend for the Gaia SVOD. I have probably watched about an hour of total programming, spent some time browsing the app, etc.

 

Some thoughts:

 

1) The non yoga content is very strongly oriented towards New Age type philosophy and spiritualism, alternative health, and conspiracy theories. Currently the most popular "Gaia Originals" original program (there is non-yoga programming that appears to be produced in house) is a show where David Wilcock (Google him) rambles in front of a green screen.

 

2) I have absolutely no idea how much market there is for this, either in the US or with English speakers worldwide. I am 100% not target market, but there may be millions of people out there who eat this stuff right up. People are commenting on the videos in the app so there are some users who must be very engaged.

 

3) The overall feel and look of the app isn't as slick as Amazon Prime or Netflix. It isn't bad though.

 

4) One of the advantages that Gaia's yoga videos have over the mom and pop studios that are streaming classes is that there is more diversity in the instructors/environments/class styles.