GAIA - Gaiam Inc.

[KJP]

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.

 

I'm also not part of the target audience and had the same impression of their non-yoga content.  I don't think anyone really knows how big their market is.  It would be particularly interesting to know how much streaming time consists of yoga videos versus the other content.

[KJP]

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

 

I have not been able to come up with an estimate based on the disclosures to date, because the company has not disclosed the churn rate or the number of gross subscriber adds.  Below I've pulled together the information I've found on the issue.  I'd welcome any thoughts on an estimate based on this information, or other information you've dug up.   

 

Subscribers Number [All from conference call transcripts]

3/17/14:  80,000

3/15/15: 100,000

5/7/15:  115,000

8/6/15: 126,000

1/1/16: 135,000

3/15/16: 155,000

5/10/16:  167,000

 

Advertising Expense [Disclosed in standalone financials in Form 10s for proposed spin-off]

2014:  $4.5 million

2015:  $5.4 million

 

Commentary on CAC v LTV

 

8/6/15 Earnings call

George Kelly

 

Okay got you. Just on yoga. And then shifting over to the TV business Jirka you mentioned that when the spin happens you could look to accelerate growth again closer to 85%, where it was in 2014, what is that due to the model, what happens to the breakeven right then and if you could talk about sort of the changes that that would place sun on the model?

 

Jirka Rysavy

 

There is still very little change except how aggressively you go in marketing, you know – the number what we can pay for new customers at current level profitability is the only question because you have a contribution margin about 85% in cash, so it is a function how fast you get customers upfront. We can grow potentially even faster because we still probably acquire – during the last year we acquired customers about half of the life time value, now we are probably more or like 25% range of our life time value. And so there is definitely, the difference is basically how much marketing you do and how high you go with the acquisition. So, that is the difference. There is very little difference on the other lines.

 

11/5/15 Earnings Call

Unidentified Analyst

 

Okay. And then on TV you mentioned, you are growing at 35%. But I think you said, but want to go to 85%. Can you walk me through what you do to I mean that sounds like great growth. But how does one just decide to grow 85% just a matter of spending and where would that spend be?

 

Jirka Rysavy

 

Well, yes, it’s question of the marketing costs, how much we willing to spend. For the new customers, you know last year we spend about half of our lifetime value for the customers, this year we are spending about 20%. So it’s about 37%, we grew right now, it’s pretty good rate for regular company but not for, it’s way too small to grow just 37%.

 

So we expect to go back to that, and it’s purely just managing the cost per new customer.

[SlowAppreciation]

Curious if anyone is still following this company? They just sold their merchandise segment for ~$180m and the stock is now trading at ~$202m. Their HQ building is available for sale and estimated ~$20m (though carried below cost on the balance sheet) so you're effectively getting the streaming business for free.

[KJP]

There is another thread with recent posts.  It has a comma in the topic heading.

[SlowAppreciation]

I've been looking at this one too, and the consensus seems to that the 24.54m shares reduces to 15m shares after tender (9.5m shares @ $7.75/share). Leaving us with:

 

• $5/share in cash ($93m)
  
• $1.33/share for Denver building ($20m)
  
• Total:$6.32/share
  

 

At the current price of $8.19/share, that means the SVOD business is valued at $1.87/share ($28m). It does seem compelling, but I do have some concerns:

 

• Wary of valuing a company based illiquid assets like property. It works in some situations, but always seems to be poorly correlated to returns. I guess since management stated their intent to sell, it can be treated as "close to cash"?
  
• How much of that cash needs to go to CAC? That # could easily drop as they aggressively increase marketing/acquisition
  
• While I'm not the target audience, I've asked a number of friends who are yoga teachers and dedicated practitioners what they used to stream classes, and every single one of them said Yogaglo. Their view of GAIA was that they were a middle-market company, more geared towards casual practitioners and/or people who take it up briefly as a hobby. Yogaglo was unquestionably the industry standard in their mind.
  
• We don't know churn #s or total addressable market. Why is management so confident they can grow at 85%?
  

 

Unless you base value on "how much would this company get acquired for", I think this one is just too hard to value with the limited information. If the streaming business is ultimately to be worth more than $28m, we would really need to know the addressable market and churn rates. At least enough for me to get comfortable with it.

[KJP]

I think you might be a bit high on the existing cash.  After transaction costs and some tax leakage, I think they'll have closer to $70 - $75 million in cash.

 

As for valuation, I agree it is difficult (perhaps impossible) right now to estimate the economics of the SVOD business.  Part of my bullish view is that Rysavy appears to be a very savvy businessman, he has information about the economics of the SVOD business that we don't have, and he chose to double down on the SVOD business by selling the branded business and not tendering any of his shares. 

 

I also think that over the next few years the company may never trade at an attractive standalone valuation, because a strategic acquirer likely could cut significant costs and perhaps lower CAC. 

[SlowAppreciation]

I think you might be a bit high on the existing cash.  After transaction costs and some tax leakage, I think they'll have closer to $70 - $75 million in cash.

 

As for valuation, I agree it is difficult (perhaps impossible) right now to estimate the economics of the SVOD business.  Part of my bullish view is that Rysavy appears to be a very savvy businessman, he has information about the economics of the SVOD business that we don't have, and he chose to double down on the SVOD business by selling the branded business and not tendering any of his shares. 

 

I also think that over the next few years the company may never trade at an attractive standalone valuation, because a strategic acquirer likely could cut significant costs and perhaps lower CAC.

 

Ah I think you're right. Thought I saw a filing paper that showed $93m as the tender offer, but now I recall it being mentioned earlier in this thread that it was unsubscribed.

 

I agree that Rysavy's track record makes GAIA much more compelling. While I'm still on the fence, his influence is a big plus in the "pro" column for me.

 

So I guess my question for you is do you view this as a standalone business, or is the thesis mostly dependent on an acquisition (e.g., Netflix)?

[KJP]

 

So I guess my question for you is do you view this as a standalone business, or is the thesis mostly dependent on an acquisition (e.g., Netflix)?

 

According to management, the business could be breakeven and grow at 30%.  We can't yet verify those numbers, but if that's roughly right, then the company could be cash flow positive today at slower growth and would have a significant positive value if you put it in run-off and did a DCF.  But I think the possibility of an acquisition is always there, and the market price will eventually reflect that.       

 

   

[thinkpad]

http://ir.gaia.com/press-releases/detail/225/gaia-reports-second-quarter-2016-results

Only 170.000 members on june 30 compared to 167.000 on may 10th.

These are strange numbers compared to the 45% growth announced.

[iambagman]

The cash number is stranger - they had no balance sheet in the release and indicated $6M in cash in the text - They should have several multiples of this -  must all be in short term investments - seems odd to downplay this.  The optimist in me says that the company has money left over from under subscribed tender - looking to buy back stock - not going to connect all of the dots for investors.  The cynic in me wonders what they are thinking.

[KJP]

http://ir.gaia.com/press-releases/detail/225/gaia-reports-second-quarter-2016-results

Only 170.000 members on june 30 compared to 167.000 on may 10th.

These are strange numbers compared to the 45% growth announced.

 

Both of the subscriber numbers are hard to understand.  As you mentioned, this year's growth in May and June seems very low.  But the same thing apparently happened last year.  According to the release, on 6/30/15 they had 117,000 subs, but during last year's Q1 call they said they had 115,000 subs as of 5/7/15.  So, in both years sub growth in May and June was very low, and much lower than the numbers for the rest of the year.  I suppose it's possible that there's significant seasonality to the business -- people joining primarily in the colder months when they want to stay home, rather than in late spring/early summer -- but I wouldn't expect any such effect to be that pronounced.

[KJP]

The cash number is stranger - they had no balance sheet in the release and indicated $6M in cash in the text - They should have several multiples of this -  must all be in short term investments - seems odd to downplay this.  The optimist in me says that the company has money left over from under subscribed tender - looking to buy back stock - not going to connect all of the dots for investors.  The cynic in me wonders what they are thinking.

 

The sales closed July 1, and the balance sheet number they gave is as of 6/30.  They could have said what the cash number is today, but, as you noted, chose not to. 

 

EDIT:  On the conference call they estimated they would have $60 million after all tax payments.

[KJP]

I thought the call was encouraging for the following reasons:

 

1) 45% y-o-y growth in subs has conformed to management projections, which suggests they have a good handle on the business.  They also reaffirmed their views about future growth rates.

 

2) Rysavy confirmed that the company could be profitable today if chose to throttle back growth.

 

3) Rysavy confirmed that current CAC's are significantly less than 50% of LTV, and at around 25-30% in the best channels, with LTV being calculated based on incremental net margin, rather than simply incremental revenue.

 

3) Most importantly, I think, was the breakdown in streaming viewership among of the various types of content.  The company categorized its content into three buckets with the following percentages of viewership:  Seeking Truth (40%); Yoga (40%); Spiritual Growth (20%).  Rysavy acknowledged competition in the yoga segment and explained that people who watch primarily yoga videos are the cheapest to acquire but don't stay as long.  This is consistent with the anecdotal evidence provided earlier in the thread about Gaia not being the choice of serious yoga people.  Gaia does, however, appear to have the largest collection of "Seeking Truth" content, which is a Rysavy said is a category the company "dominates."  Moreover, the subs who watch primarily the "Seeking Truth" content stay much longer, which is helped in part by the episodic nature of some of that content.  I think this is very good for the business -- they're targeting a specific niche with a significant volume of episodic, self-produced content that no one else seems to be targeting, rather than simply being just another yoga streaming service.

 

The non-yoga content is the type of stuff that most people on Wall Street (and most people anywhere) would roll their eyes at.  That alone probably makes this company worth a look.   

[Guest roark33]

Here are some rough numbers from a call with the CEO on churn and acquisition costs.  (he asked to keep this private, which made me want to post it even more).  I don't really see why they would share this on a direct call, but not in a conference call. 

 

Yoga--about 16 months

Seeking Truth--little over 3 years.

 

 

But since the service is so young, these numbers are still fluid. 

For Yoga, the cac is $35, and for Seeking, it's "higher" but not over 50%. 

 

I am still on the fence about the company (although I did buy some shares pre-tender).  I think the CEO knows what he is doing and is highly motivated, but I am not sure the market is as big as he thinks.  That's my biggest concern. 

 

[SlowAppreciation]

Here are some rough numbers from a call with the CEO on churn and acquisition costs.  (he asked to keep this private, which made me want to post it even more).  I don't really see why they would share this on a direct call, but not in a conference call. 

 

Yoga--about 16 months

Seeking Truth--little over 3 years.

 

 

But since the service is so young, these numbers are still fluid. 

For Yoga, the cac is $35, and for Seeking, it's "higher" but not over 50%. 

 

I am still on the fence about the company (although I did buy some shares pre-tender).  I think the CEO knows what he is doing and is highly motivated, but I am not sure the market is as big as he thinks.  That's my biggest concern.

 

I'm with you. I think I'll be sitting this one on the sidelines.

[namo]

The breakdown was indeed quite interesting.

But I wonder if other companies will soon move into the Seeking Truth segment... Perhaps focusing on it exclusively?

Gaia has a headstart (and profitability), but not much else.

 

Thanks for the numbers, roark.

 

Disclosure: I have a position in GAIA.

It will never grow too big because I'm uncomfortable with the value of their Seeking Truth productions... (I'm not "Wall Street people" but I'm an engineer...)

[KJP]

Roark -- thanks very much for sharing the numbers. 

 

I also have no way to estimate the size the market for their content.  For that reason alone, it may be wise to stay away.  But I'm long this company based on Rysavy's history and alignment of interests and the following math: 

 

Based on the numbers Roark provided, I estimate that, to keep subs constant, they'd need to spend about $26 per year for each current yoga sub [35 * 12/16] and no more than $50 per Seeking Truth sub. 

 

My calculation for the Seeking Truth $50 number is as follows:  Assuming CAC = 50% of LTV (conservative based on management statement to Roark), subs stay for 3 years at $10/month and incremental margin is 85%, then CAC = .5 * 36 * 10 * .85 = ~150.  If the average sub last three years, then annual replacement cost = CAC/3 = $50. 

 

If you assume a 50/50 yoga-"Seeking Truth" split among subs now and in the future, the no-growth annual required advertising cost would be [.5*total subs*26] + [.5*total subs*50].  If you use that formula and the expense numbers from the previously disclosed 2015 pro formas, the streaming business would look something like this if profitable growth peters out around 300,000 subs at year end 2017, meaning Rysavy is way way off about the market size:

 

(in millions)

Run-Rate Revenue:  36

Gross Profit: 30.6 [85% gross margin]

Op Ex Less Adv:  (8.9) [2015 pro forma inflated at 5% per year for two years; assumes all CAC is accounted for in disclosed advertising expense of $5.4 million]

Corp G&A:  (3.1) [same]

Previously Unallocated Corp G&A (3) [same inflation rate; unclear whether this is double-counting some corp expenses]

Advertising: (11.4)

Operating Income:  4.1

 

I think I've likely double counted expenses, and an acquirer could slash a lot of expenses, so even in this scenario in which Rysavy is way, way off, the company should be worth more than the current price, even accounting for some interim cash burn.

 

 

If growth can continue to 500,000 subs by year end 2018, which is still significantly below management's expectations, and you assume continued 5% compound annual cost inflation, you get something like this:

 

Run-rate Revenue:  60

Gross Profit:  51

Op Ex Less Adv:  (9.3)

Corp G&A: (3.3)

Prev. Unallocated G&A:  (3.2)

Adv: (19)

Operating Income: 16.2

 

There are a ton of assumptions here, some of which are (I think) conservative interpretations of existing data/management statement and some of which are just guesses.  But I think they illustrate that even if Rysavy is way, way off on the ultimate market size, the company is undervalued (and potentially significantly undervalued) if the current CAC/LTV numbers are roughly right.

 

Also, if the CAC/LTV numbers really start to go south, minority shareholders are aligned with Rysavy and can fall back on the cash pile, the building, and whatever value the then-existing sub base has to a strategic buyer. 

 

If anyone thinks the above analysis is naive/dumb/pie-in-the-sky, I'm all ears.

 

 

[KJP]

The breakdown was indeed quite interesting.

But I wonder if other companies will soon move into the Seeking Truth segment... Perhaps focusing on it exclusively?

Gaia has a headstart (and profitability), but not much else.

 

 

Namo,

 

I think there's a strong relationship between market size and the likelihood of competition.  A competitor would have to produce (or buy) their own content and try to amortize it over the biggest subscriber base possible.  But if the total market for this type of content is only 500,000 or so, Gaia will already have grabbed alot of that, so it would be difficult for a competitor to justify the investment in content and the operating losses that would come with an extended fight for market share is a relatively small market.  Said another way, the smaller the market, the bigger the competitive advantage Gaia has in its existing library.  On the other hand, if the market size is really 5,000,000 people, then there is room for a competitor, but that also means that the concerns about Gaia's market size are off base, and both it and a new competitor could grow profitably for quite some time.   

[Guest roark33]

KJP,

On those numbers, a few tweaks, Yoga is about 65 and Lifestyle is about 30, and there is another small division that makes up the rest (I couldn't understand him a few times and felt bad asking him to keep repeating himself). 

 

For me the biggest risk isn't a direct competitor because I think KJP is right, but more of an aggregator that allows sellers to take a cut.  For example, youtube, could start a subscription service, where they are merely the interface and payment gateway, but the "homemade" content provider gets 70% of the revenue and google takes a 30% cut, sort of like apple.  This subscription service would get around the problem of youtube having to buy a lot of content, but it wouldn't be as curated...But that would worry me a little. 

 

Also, they are just too small.  20m run rate, that's just too small to be a public company, especially when the majority shareholder owns 38%, seems like bad business to spend 500k-1m in public company costs.  And that's probably on the low end.  I am not as excited as the small fund manager who keeps talking about it on twitter, but it is a nice little idea....

[KJP]

Roark, thanks for the additional thoughts and color.  I agree it's hard to justify public company costs/overhead at current company size. 

[btgmf]

Just wanted to add a few links:

 

Presentation posted to EDGAR today: https://www.sec.gov/Archives/edgar/data/1089872/000119312516706633/d255864dex991.htm

 

Ariel Investments files 13G with 1.3M shares, so (roughly 8% to 9% of overall company, though 13% to 14% of the Class A): https://www.sec.gov/Archives/edgar/data/936753/000093675316000338/gaia.txt

 

My brief write-up on the company: http://letsbreakthegame.com/2016/09/12/gaia/

[alwaysdrawing]

GAIA potentially issuing shares right after their tender?

 

http://ir.gaia.com/sec-filings-email/content/0001193125-16-727538/d264343ds3.htm

 

Seems like they are burning cash quicker than expected--will be interesting to see where their Q3 numbers come in as far as subscriber growth.

[BMC34]

I believe this is just a renewal of an existing shelf that has been in place for years.  They have to renew the filing every couple of years.  I would Not expect the company to use the shelf in the near future, if at all.  They have more than enough cash on the balance sheet (~$60mm) to fund operations for the next several years, and they also have a HQ that they could potentially sell for ~$20mm should they need additional funds. 

[thinkpad]

Correct. Just got an email confirmation from IR.

It is just a renewal of the existing shelf.

[thinkpad]

hello,

is there any news I missed ? the price is going down since a few weeks.

I hope I had more cash to add more ... :(