GAIA - Gaiam Inc.

[LounginMKL]

I've seen a similar movie before in CafePress (NASDAQ:PRSS)

- Two founders started the company and IPOd'd at $20/sh

- Professional manager ran it to the ground by acquiring different verticals

- Founders kicked out CEO to return to the helm, sold off all acquired business and kept the original business (customized t-shirts/mugs)

- Sitting on a pile of cash and no debt, PRSS at one point was trading almost at cash level

 

So the pitch became... entrepreneurs at the helm, look them buying back shares, look at them buying shares for themselves...

I listened to the siren and bought some shares, only to see the share price dwindle because I failed to see that the company no longer has the mind share of consumers with the rises of Zazzle and Shutterfly, among other startups...

 

This time around, I only ask one question- Can the SVOD business be profitable on its own. Based on my 10 mins of previewing the app on my Roku, I'm not confident that it will.

 

On another note, I found a '98 Fortune article on Gaia's CEO. It could be that this SVOD business is just his "mission."

JIRKA RYSAVY HIGH ABOVE BOULDER, COLO.

 

Up a serpentine Rocky Mountain road, 2,500 feet above Boulder, sits a tiny cabin so remote that FedEx doesn't even deliver here. It has no indoor plumbing. An outhouse sits across the dirt road. The kitchen has the bare essentials--toaster oven, hot plate. The FORTUNE 500 company boss who lives here year-round makes dinner--Tofu Pups and other vegetarian "food"--outside over an open fire. An environmental guy, he uses twigs to cook.

 

Jirka Rysavy, 44, is the founder and chairman of Corporate Express, the world's largest supplier of office products and procurement services to corporations. A native of Czechoslovakia and onetime champion hurdler there, Rysavy moved to the U.S. in 1984 and started a business selling recycled office products. Following a formula that the late Sam Walton would have blessed--sell cheap and more efficiently than anybody else--he's increased revenues to an estimated $4.5 billion this year. Corporate Express, with 27,500 employees in ten countries, doesn't operate stores. It sells direct, providing one-stop shopping--from staplers and software to furniture--to customers such as General Motors, J.P. Morgan, and Oracle. Rysavy is personally worth over $75 million.

 

Sitting on the floor of his dimly lit study, the lanky, soft-spoken chairman explains that he prefers to keep his life simple and frugal--like his business. "I have everything I always wanted. Just because I have money, why should I buy extra stuff?"

[Travis Wiedower]

Anybody else turned off by a company that targets conspiracy theorists as one of their main demographics?

 

I'd guess most people in this thread are more likely to underestimate that part of their target market as opposed to overestimating it (because we're not a part of it).

 

Do tell....I don't really understand this point, but I am excited for the great and funny story.

 

I assume you're referring to my second sentence? People who are a part of a group (conspiracy theorists) are more likely to overestimate how many conspiracy theorists there are in the world because they are overly exposed to that group. People who are not part of a group (non-conspiracy theorists, probably most of this thread) are more likely to underestimate how many conspiracy theorists there are in the world because we are under exposed to that group (I know exactly one person in my life who I'd classify as a conspiracy theorist so my assumption is there are very few of them).

 

My first and second sentences kind of contradict each other. I have no desire to invest in a company that's targeting conspiracy theorists, but at the same time I recognize conspiracy theorists are probably a bigger market than I realize.

[Travis Wiedower]

btgmf,

 

I don't have any hard evidence, but based on his net worth being $75M in 1998 (before IPO/selling) and he lives a super frugal lifestyle, I'd guess his net worth has compounded at some positive rate since then.

[Picasso]

btgmf,

 

I don't have any hard evidence, but based on his net worth being $75M in 1998 (before IPO/selling) and he lives a super frugal lifestyle, I'd guess his net worth has compounded at some positive rate since then.

 

That was my thinking as well, but it's quite possible he does have half his net worth tied up in GAIA.  So I take back the net worth/incentive comment because he might be driven to get a return out of it.  But even if he ends up with a stock at $3, he's not going to be hurting.  Probably won't lose sleep over it either.

 

If I had a call with management, I'd ask how he views other shareholders.  He already offered a generous tender so anyone who wanted to exit because of being uncomfortable with the strategy had a good opportunity.  It's possible that he views the remaining investors as passengers on his journey because they "opted in" by not opting out.

 

It's also not unusual for a stock to trade below the offer on an undersubbed tender.  There are different reasons for this which might be better to discuss on the strategies section...  It seems like the Greenhaven pitch was the reason for the recent rally?  Or maybe not, not entirely sure why people would drive up the price on that pitch.

 

Btw KJP, I wan't referring to you when I mentioned the price dropping.  I think your posts are among the best on the board, was more poking fun at FCAU or GM with pages and pages of "why does it keep falling."

[wjsco]

I've seen a similar movie before in CafePress (NASDAQ:PRSS)

- Two founders started the company and IPOd'd at $20/sh

- Professional manager ran it to the ground by acquiring different verticals

- Founders kicked out CEO to return to the helm, sold off all acquired business and kept the original business (customized t-shirts/mugs)

- Sitting on a pile of cash and no debt, PRSS at one point was trading almost at cash level

 

So the pitch became... entrepreneurs at the helm, look them buying back shares, look at them buying shares for themselves...

I listened to the siren and bought some shares, only to see the share price dwindle because I failed to see that the company no longer has the mind share of consumers with the rises of Zazzle and Shutterfly, among other startups...

 

This time around, I only ask one question- Can the SVOD business be profitable on its own. Based on my 10 mins of previewing the app on my Roku, I'm not confident that it will.

 

On another note, I found a '98 Fortune article on Gaia's CEO. It could be that this SVOD business is just his "mission."

JIRKA RYSAVY HIGH ABOVE BOULDER, COLO.

 

Up a serpentine Rocky Mountain road, 2,500 feet above Boulder, sits a tiny cabin so remote that FedEx doesn't even deliver here. It has no indoor plumbing. An outhouse sits across the dirt road. The kitchen has the bare essentials--toaster oven, hot plate. The FORTUNE 500 company boss who lives here year-round makes dinner--Tofu Pups and other vegetarian "food"--outside over an open fire. An environmental guy, he uses twigs to cook.

 

Jirka Rysavy, 44, is the founder and chairman of Corporate Express, the world's largest supplier of office products and procurement services to corporations. A native of Czechoslovakia and onetime champion hurdler there, Rysavy moved to the U.S. in 1984 and started a business selling recycled office products. Following a formula that the late Sam Walton would have blessed--sell cheap and more efficiently than anybody else--he's increased revenues to an estimated $4.5 billion this year. Corporate Express, with 27,500 employees in ten countries, doesn't operate stores. It sells direct, providing one-stop shopping--from staplers and software to furniture--to customers such as General Motors, J.P. Morgan, and Oracle. Rysavy is personally worth over $75 million.

 

Sitting on the floor of his dimly lit study, the lanky, soft-spoken chairman explains that he prefers to keep his life simple and frugal--like his business. "I have everything I always wanted. Just because I have money, why should I buy extra stuff?"

 

possibly. but you know how the staples and office depot merger was called off because of their b2b business? well this guy moved to the usa from like russia in 1980 - from a communist country to a capitalist one - and then within a decade was creating what would soon become staples' business to business platform. and then he sold it to staples for alot of money in the mid 90s. and yes i think he started in boulder, although not 100% sure. and that b2b platform is basically the only valuable part of either staples or office depot(he only did staples, but point is he assembled a valuable asset). pretty impressive story quite frankly...there are some good articles out there. he's preetty talented it seems...take that, and then couple it with his super hippie hobbie, and it could be a recipe for success

[writser]

I agree with Picasso / Travis. At $6 this was probably a decent deal as you got the streaming stuff for free (I'd discount the cash a little bit as they are planning to plow it back to grow the business). But with the stock at $8 or $9 you start paying up for the video site.

 

Now, if you believe the CEO and Greenhaven hype you're looking at 40% growth rates and a potential userbase of 10m hot rich girls in yoga pants. Sure, that's worth a lot. But the base rate scenario is that most websites A) suck or B) will suck in a few years. There's a boatload of free yoga content on YouTube etc. If I google 'yoga videos' I don't even see Gaia on the frontpage. Sure, they already have 200k subscribers - they are not totally worthless. But churn is high and I think it is likely the growth story doesn't work out. I wouldn't pay more than ~$40m for this business. In fact I'd prefer to pay a lot less because I like my businesses cheap. Gets me to 40 + 20 + 60 (discount cash a little bit) = 140m or $7.90 per share. Roughly the current price. This is just my one minute valuation. If you are an optimist or a believer in management this is worth a lot more.

[Homestead31]

 

 

This time around, I only ask one question- Can the SVOD business be profitable on its own. Based on my 10 mins of previewing the app on my Roku, I'm not confident that it will.

 

 

 

i think this question has already been answered.  the company chose to slow growth in mid 2015 and became cash flow positive for a while.  then they decided to re-accelerate growth, so are not currently profitable.  in their presentation they say they can be profitable at any time with 90 days notice.

 

agree that the "mission" aspect is a risk.  if VOD doesn't work, management needs to abandon it and do something else with the cash.  the "mission" angle makes that a bit less likely, although the CEO's track record is good.

[glorysk87]

The only thing I'll add from my admittedly brief look at the company is that the forecasts on subscriber growth rates that Greenhaven has over the next 5 years seem insane, and totally disconnected from historical growth. That alone was red flag enough for me to back off.

[KJP]

The only thing I'll add from my admittedly brief look at the company is that the forecasts on subscriber growth rates that Greenhaven has over the next 5 years seem insane, and totally disconnected from historical growth. That alone was red flag enough for me to back off.

 

I haven't seen any real insight into likely sub growth from any of the writeups by Greenhaven, Artko or Laughing Water (or, for that matter, my own on the first page of this thread).  Instead, they all simply calculate what the financials would look like if Rysavy's views about future sub growth are correct.  In other words, they are really just mechanical calculations that illustrate the potential operating leverage of the business model, rather than beliefs about what actually will happen based on independent work done to establish TAMs, penetration rates, etc. 

 

In my view, the real question raised by the various posts on this thread in the last 24 hours is whether you need to have a firm view about sub growth (and accompanying CACs) to invest in this company at current prices.  The longs say you don't, because of (i) the asset base (cash/building/existing sub base), and (ii) Rysavy won't chew up the assets pursuing a failing business model.  Any longs claiming to have a firm view on what sub growth will in fact be are likely kidding themselves into thinking they know the unknowable.   

 

The bears/non-longs say you do need to have a firm view on sub growth, because (i) the asset base will partially melt away because the business is and will remain cash flow negative and (ii) Rysavy can't be counted on to protect you, because this may be a passion project for him, rather than a financial investment.  The bears/non-longs either can't form an opinion on sub growth and thus view the company as uninvestable or believe there won't be adequate sub growth because of their own personal views of the content and potential competitors, e.g., YouTube. 

 

Although I fall into the long camp, I don't think the bears/non-longs approach is necessarily wrong, though I think they may be overstating their ability to predict whether there are or are not enough people across the globe who are willing to pay for Gaia's content.  The actual evidence on this point is thin.  Given the anecdotes provided on this thread and the churn rates provided by Roark via Rysavy, Gaia's yoga offering is not particularly strong and there are many competitors.  Therefore, the value, if any, appears to be in the other content, which has much lower churn rates, but has also (fairly) been described as including, among other things, kooky conspiracy theory stuff.  There isn't single poster (me included) who has acknowledged any desire to pay even a nickel for "Seeking Transformation" or "Spiritual Growth" content.  But that doesn't surprise me.  Anyone inclined to read and post on this board is not likely to be interested in that sort of stuff.  But this board is not representative of the country (or the world) as a whole.  For example, I doubt this board includes many believers in things that I personally think are kooky, such as astrology, birtherism, and Graham Hancock.  Yet there many people who are interested in that stuff (Hancock has sold more than 5 million books!).  So, my view is I simply don't know what the market for Gaia's content really is.

 

I'm nevertheless long Gaia because, in part, I put more faith than others in the assets and Rysavy, particularly because (to date at least) he has had a very firm handle on growth rates and CACs and he doesn't seem to be the kind of person who would waste his time on a bullshit business.  But more importantly, I think this is a situation in which you are going to be able to determine, based on published financials, whether the business model is working or not and whether Rysavy is managing this like an investment or a passion project.  In particular, you will be able to see, in fairly real time, what net sub growth is and how much it's costing to get that sub growth, and you'll be able to see how much cash Rysavy is putting into new content.  Rysavy also discloses CAC to LTV, so you can monitor that with the understanding that his LTV is, at best, an estimate.  You can then compare the actual results to a fairly simple model financial model that you can develop in about an hour to determine whether the business model is conforming to what your model suggests is necessary for the business to be profitable. (There is a some risk that you will be a bit behind bigger investors, however, because Reg FD doesn't appear to be front-and-center in Rysavy's mind.)

 

Much of the rest of the "information" in the writeups I've seen is irrelevant noise at best, and potentially misleading pumping at worst.  As Picasso pointed out earlier, the fact that an anime SVOD service has 700,000 subs says essentially nothing about Gaia's future.  Likewise, Laughing Water's suggestion that the $60 million or so in cash is somehow a hidden asset and a "catalyst" because it hasn't shown up in a 10-Q yet is hard to take seriously.  Similarly, spending 1,000 words on whether the building is worth $28 million rather than $20 million is a waste of time and shouldn't be driving anyone's investment decisions.

 

Thanks to the bears/non-longs who have taken the time to insert a few discordant notes into the long-side echo chamber that was developing around this company.  If nothing else, those comments should prompt any longs to think carefully about why they're invested in this company and, just as importantly, what would prompt them to sell. 

[SlowAppreciation]

The only thing I'll add from my admittedly brief look at the company is that the forecasts on subscriber growth rates that Greenhaven has over the next 5 years seem insane, and totally disconnected from historical growth. That alone was red flag enough for me to back off.

 

I haven't seen any real insight into likely sub growth from any of the writeups by Greenhaven, Artko or Laughing Water (or, for that matter, my own on the first page of this thread).  Instead, they all simply calculate what the financials would look like if Rysavy's views about future sub growth are correct.  In other words, they are really just mechanical calculations that illustrate the potential operating leverage of the business model, rather than beliefs about what actually will happen based on independent work done to establish TAMs, penetration rates, etc. 

 

In my view, the real question raised by the various posts on this thread in the last 24 hours is whether you need to have a firm view about sub growth (and accompanying CACs) to invest in this company at current prices.  The longs say you don't, because of (i) the asset base (cash/building/existing sub base), and (ii) Rysavy won't chew up the assets pursuing a failing business model.  Any longs claiming to have a firm view on what sub growth will in fact be are likely kidding themselves into thinking they know the unknowable.   

 

The bears/non-longs say you do need to have a firm view on sub growth, because (i) the asset base will partially melt away because the business is and will remain cash flow negative and (ii) Rysavy can't be counted on to protect you, because this may be a passion project for him, rather than a financial investment.  The bears/non-longs either can't form an opinion on sub growth and thus view the company as uninvestable or believe there won't be adequate sub growth because of their own personal views of the content and potential competitors, e.g., YouTube. 

 

Although I fall into the long camp, I don't think the bears/non-longs approach is necessarily wrong, though I think they may be overstating their ability to predict whether there are or are not enough people across the globe who are willing to pay for Gaia's content.  The actual evidence on this point is thin.  Given the anecdotes provided on this thread and the churn rates provided by Roark via Rysavy, Gaia's yoga offering is not particularly strong and there are many competitors.  Therefore, the value, if any, appears to be in the other content, which has much lower churn rates, but has also (fairly) been described as including, among other things, kooky conspiracy theory stuff.  There isn't single poster (me included) who has acknowledged any desire to pay even a nickel for "Seeking Transformation" or "Spiritual Growth" content.  But that doesn't surprise me.  Anyone inclined to read and post on this board is not likely to be interested in that sort of stuff.  But this board is not representative of the country (or the world) as a whole.  For example, I doubt this board includes many believers in things that I personally think are kooky, such as astrology, birtherism, and Graham Hancock.  Yet there many people who are interested in that stuff (Hancock has sold more than 5 million books!).  So, my view is I simply don't know what the market for Gaia's content really is.

 

I'm nevertheless long Gaia because, in part, I put more faith than others in the assets and Rysavy, particularly because (to date at least) he has had a very firm handle on growth rates and CACs and he doesn't seem to be the kind of person who would waste his time on a bullshit business.  But more importantly, I think this is a situation in which you are going to be able to determine, based on published financials, whether the business model is working or not and whether Rysavy is managing this like an investment or a passion project.  In particular, you will be able to see, in fairly real time, what net sub growth is and how much it's costing to get that sub growth, and you'll be able to see how much cash Rysavy is putting into new content.  Rysavy also discloses CAC to LTV, so you can monitor that with the understanding that his LTV is, at best, an estimate.  You can then compare the actual results to a fairly simple model financial model that you can develop in about an hour to determine whether the business model is conforming to what your model suggests is necessary for the business to be profitable. (There is a some risk that you will be a bit behind bigger investors, however, because Reg FD doesn't appear to be front-and-center in Rysavy's mind.)

 

Much of the rest of the "information" in the writeups I've seen is irrelevant noise at best, and potentially misleading pumping at worst.  As Picasso pointed out earlier, the fact that an anime SVOD service has 700,000 subs says essentially nothing about Gaia's future.  Likewise, Laughing Water's suggestion that the $60 million or so in cash is somehow a hidden asset and a "catalyst" because it hasn't shown up in a 10-Q yet is hard to take seriously.  Similarly, spending 1,000 words on whether the building is worth $28 million rather than $20 million is a waste of time and shouldn't be driving anyone's investment decisions.

 

Thanks to the bears/non-longs who have taken the time to insert a few discordant notes into the long-side echo chamber that was developing around this company.  If nothing else, those comments should prompt any longs to think carefully about why they're invested in this company and, just as importantly, what would prompt them to sell.

 

Well said, and I agree with all your points. I decided to sit this one out, but wouldn't be surprised to see it doing well for longs. Time will tell

[glorysk87]

The only thing I'll add from my admittedly brief look at the company is that the forecasts on subscriber growth rates that Greenhaven has over the next 5 years seem insane, and totally disconnected from historical growth. That alone was red flag enough for me to back off.

 

I haven't seen any real insight into likely sub growth from any of the writeups by Greenhaven, Artko or Laughing Water (or, for that matter, my own on the first page of this thread).  Instead, they all simply calculate what the financials would look like if Rysavy's views about future sub growth are correct.  In other words, they are really just mechanical calculations that illustrate the potential operating leverage of the business model, rather than beliefs about what actually will happen based on independent work done to establish TAMs, penetration rates, etc. 

 

In my view, the real question raised by the various posts on this thread in the last 24 hours is whether you need to have a firm view about sub growth (and accompanying CACs) to invest in this company at current prices.  The longs say you don't, because of (i) the asset base (cash/building/existing sub base), and (ii) Rysavy won't chew up the assets pursuing a failing business model.  Any longs claiming to have a firm view on what sub growth will in fact be are likely kidding themselves into thinking they know the unknowable.   

 

The bears/non-longs say you do need to have a firm view on sub growth, because (i) the asset base will partially melt away because the business is and will remain cash flow negative and (ii) Rysavy can't be counted on to protect you, because this may be a passion project for him, rather than a financial investment.  The bears/non-longs either can't form an opinion on sub growth and thus view the company as uninvestable or believe there won't be adequate sub growth because of their own personal views of the content and potential competitors, e.g., YouTube. 

 

Although I fall into the long camp, I don't think the bears/non-longs approach is necessarily wrong, though I think they may be overstating their ability to predict whether there are or are not enough people across the globe who are willing to pay for Gaia's content.  The actual evidence on this point is thin.  Given the anecdotes provided on this thread and the churn rates provided by Roark via Rysavy, Gaia's yoga offering is not particularly strong and there are many competitors.  Therefore, the value, if any, appears to be in the other content, which has much lower churn rates, but has also (fairly) been described as including, among other things, kooky conspiracy theory stuff.  There isn't single poster (me included) who has acknowledged any desire to pay even a nickel for "Seeking Transformation" or "Spiritual Growth" content.  But that doesn't surprise me.  Anyone inclined to read and post on this board is not likely to be interested in that sort of stuff.  But this board is not representative of the country (or the world) as a whole.  For example, I doubt this board includes many believers in things that I personally think are kooky, such as astrology, birtherism, and Graham Hancock.  Yet there many people who are interested in that stuff (Hancock has sold more than 5 million books!).  So, my view is I simply don't know what the market for Gaia's content really is.

 

I'm nevertheless long Gaia because, in part, I put more faith than others in the assets and Rysavy, particularly because (to date at least) he has had a very firm handle on growth rates and CACs and he doesn't seem to be the kind of person who would waste his time on a bullshit business.  But more importantly, I think this is a situation in which you are going to be able to determine, based on published financials, whether the business model is working or not and whether Rysavy is managing this like an investment or a passion project.  In particular, you will be able to see, in fairly real time, what net sub growth is and how much it's costing to get that sub growth, and you'll be able to see how much cash Rysavy is putting into new content.  Rysavy also discloses CAC to LTV, so you can monitor that with the understanding that his LTV is, at best, an estimate.  You can then compare the actual results to a fairly simple model financial model that you can develop in about an hour to determine whether the business model is conforming to what your model suggests is necessary for the business to be profitable. (There is a some risk that you will be a bit behind bigger investors, however, because Reg FD doesn't appear to be front-and-center in Rysavy's mind.)

 

Much of the rest of the "information" in the writeups I've seen is irrelevant noise at best, and potentially misleading pumping at worst.  As Picasso pointed out earlier, the fact that an anime SVOD service has 700,000 subs says essentially nothing about Gaia's future.  Likewise, Laughing Water's suggestion that the $60 million or so in cash is somehow a hidden asset and a "catalyst" because it hasn't shown up in a 10-Q yet is hard to take seriously.  Similarly, spending 1,000 words on whether the building is worth $28 million rather than $20 million is a waste of time and shouldn't be driving anyone's investment decisions.

 

Thanks to the bears/non-longs who have taken the time to insert a few discordant notes into the long-side echo chamber that was developing around this company.  If nothing else, those comments should prompt any longs to think carefully about why they're invested in this company and, just as importantly, what would prompt them to sell.

 

I guess the thing that jumps out to me is that they don't have that much cash...and they're burning a significant percentage of the cash they do have every quarter. So I'm not sure cash on the balance sheet is as secure as most who are long this name think it is.

 

So the natural next step is to say they need to generate positive cash flow in order for a higher valuation to be warranted - it would appear the only way to do this is through operating leverage on a growing sub base, right? So I'd argue that you kind of do need to have a view on sub growth even to be comfortable with the downside protection school of thought.

[KJP]

I guess the thing that jumps out to me is that they don't have that much cash...and they're burning a significant percentage of the cash they do have every quarter. So I'm not sure cash on the balance sheet is as secure as most who are long this name think it is.

 

So the natural next step is to say they need to generate positive cash flow in order for a higher valuation to be warranted - it would appear the only way to do this is through operating leverage on a growing sub base, right? So I'd argue that you kind of do need to have a view on sub growth even to be comfortable with the downside protection school of thought.

 

It's hard to respond to this without more concrete details.  What do you mean by the company not having "much cash" and "burning a significant percentage . . . every quarter."  Specifically, how much cash do you think they have now and what will be the quarterly (or annual) cash burn in 2017 and 2018 and how have you estimated that?  Will Rysavy continue to spend that cash if it's not generating sufficient sub growth at sufficient CAC to LTV? 

 

As for needing to be cash flow positive, can that be correct?  If you could acquire today for $50 a customer that would generate operating profit of $125 over the next three years, wouldn't you do that all day long?  And if you did that, you'd be cash flow negative.  Indeed, the more of those people you could get the more cash flow negative you would be.  If you don't trust any business that doesn't generate cash today, then this is not the business for you. 

 

My comments above assume you're referring to FCF after spending that, by hypothesis, will generate sub growth or be ended by Rysavy if it's unsuccessful.  If you're talking about steady-state FCF, i.e., only deducting the spending necessary to keep subs flat, isn't the company currently at or near FCF break-even?  (See the comments above about the breakeven quarters when the company was deliberately slowing growth.)  If you don't think the company currently is at least close to steady-state FCF breakeven, why do you think that and what do you think the current steady-state FCF is?

 

The critical assumption I'm making, I think, is that Rysavy won't allocate capital poorly.  If he allocates wisely, investors at current prices could still lose money, but I don't think they're looking at 50% losses.  If he allocates poorly/is pursuing a passion project, you could suffer losses that big or even greater.  My belief is that you will be able to see the passion project scenario playing out and sell before the bottom falls out.  That may be hubris, and it may turn out that I'm the one holding the bag if the SVOD business ultimately flops.   

 

EDIT:  Another assumption is that Rysavy isn't lying about CAC v. LTV.  LTVs are estimates, so I don't mean he turns out to be wrong, but rather that he's outright lying.  The company doesn't disclose enough to confirm what he's saying about those numbers.  But I don't see a motivation for him to lie.  He doesn't need to tap the capital markets for equity or debt (that's the great benefit of the cash pile) and he isn't selling shares (at least not yet).  So, there's only downside to lying, which makes it highly unlikely in my view.

 

[namo]

In my view, the real question raised by the various posts on this thread in the last 24 hours is whether you need to have a firm view about sub growth (and accompanying CACs) to invest in this company at current prices. 

 

[...]

Great post, KJP! I like the balanced approach - considering both sides of the story. Please keep contributing high-quality content to this board. :)

 

I don't have the same amount of skills, so I'll simply note that I took opportunity of the recent fall to make it a large position in my portfolio.

I don't trust the management's growth figures, but as has been mentioned we can monitor cash use vs subscriber growth, among other metrics.

[KJP]

Q3 release:  http://ir.gaia.com/press-releases/detail/228/gaia-reports-third-quarter-2016-results

 

Sub growth remains strong.  I expect the conference call will shed more light on CAC and, hopefully, what run-rate operating/corporate expenses will be. 

[SnarkyPuppy]

How is growing 10k subscribers over 3 months (5.8%) beating their expectations of 50%?

[iambagman]

From the release "Gaia's paying subscriber count at the end of the third quarter grew 46% to 180,000 compared to 123,000 at the end of the third quarter of 2015."

 

They have also indicated they will increase spend to increase growth rate.

[thinkpad]

How can they have 35% growth of revenue for 46% growth of subscribers ? does it mean subscribers spend less money or is it due on how they recognize revenue ?

 

in q2 2016 call, this question was answered like this :

"Jirka Rysavy :

Yes. You’re going in the right direction, Mark, it is subscriber growth. Revenue growth is about a quarter lag of the subscriber growth given that revenue recognition treatment that we use."

[alwaysdrawing]

My guess is they use the total subscriber count as of the last day of the quarter.  Subscribers who join in the middle to end of the quarter would have only a portion of the quarter's worth of revenue, and the rest would be deferred.

 

There is a considerable deferred revenue item on the balance sheet where the subscriber pre-payments would go until that income is earned.

 

Especially during periods of subscriber growth, I would expect the "next" quarter to fully reflect at least the revenue from the subscriber count as of the previous quarter, and at least part of the increase in revenue of the new subscribers.

[SnarkyPuppy]

How is growing 10k subscribers over 3 months (5.8%) beating their expectations of 50%?

 

I'm still not entirely clear on this.  10k subscribers between 6/30/2016 and 9/30/2016 seems very small (23.2% annualized versus 50% goal).  Guided additional 20k subscribers for the period 9/30/2016 through 12/31/2016 also seems to be under their stated target (44% annualized versus 50% goal). 

 

They additionally broke out $2.9mm in customer acquisition costs for the 3 month period ending 9/30/2016 which seems high compared to the 10k subscriber growth for Q3 and guided 20k subscriber growth for Q4. 

 

Aside from the numbers, management seemed extremely confident.  Basically said they don't expect CAC to ever exceed their limit of 50% LTV. 

 

I'm just having trouble understanding how they "exceeded" expectations even if you take their YoY Q3 growth of 46% at its face, still seems less than their stated 50% target (unless they're saying the target was simply for 1/1/2016+). 

 

Is this business really that seasonal?

[Sergio8]

Yes, it is very seasonal. According to the latest conf-call, yoga customers' peak recruitment is in Q4, whereas transformation / seeking truth customers' preak recruitment is in Q1.

[KJP]

I'm still not entirely clear on this.  10k subscribers between 6/30/2016 and 9/30/2016 seems very small (23.2% annualized versus 50% goal).  Guided additional 20k subscribers for the period 9/30/2016 through 12/31/2016 also seems to be under their stated target (44% annualized versus 50% goal). 

 

The growth is expressed y-o-y.  Does the y-o-y growth suggest that they won't have 45-50% y-o-y growth by year end?

 

They additionally broke out $2.9mm in customer acquisition costs for the 3 month period ending 9/30/2016 which seems high compared to the 10k subscriber growth for Q3 and guided 20k subscriber growth for Q4. 

 

Why does $2.9 million in customer acquisition costs "seem high"?  The $2.9 million funded gross adds, whereas the 10k increase is, effectively, net adds.  How many gross adds were there, and what is the implied CAC per gross add?  Does that implied CAC per gross add suggest a successful or failing business model?

 

Aside from the numbers, management seemed extremely confident.  Basically said they don't expect CAC to ever exceed their limit of 50% LTV. 

 

I'm just having trouble understanding how they "exceeded" expectations even if you take their YoY Q3 growth of 46% at its face, still seems less than their stated 50% target (unless they're saying the target was simply for 1/1/2016+). 

 

Is this business really that seasonal?

 

The historical quarterly subscriber numbers have been disclosed by the company and collected and reposted on this thread.  What do those numbers tell you about seasonality?

[KJP]

Some earlier posts referred to concerns about customer acquisition costs (CAC) and cash burn, without putting numbers to them.  Here’s my take on CAC based on what’s been disclosed so far and some guess work.  It builds on and refers to information provided in posts 38 and 41 on this thread, so if you’re interested you should read those posts first.  The TL;DR version:  Quarterly CAC appears to have been exactly what you would have expected it to be.

 

During the Q3 call, Rysavy said average LTV was about $250.  Based on the information in posts 38 and 41 on this thread, I assume that “Yoga” LTVs are $136 and “Spiritual Growth” (which I use to describe all other subs) LTVs are $306.  If the percentage of Yoga subs is X, then:

 

X(136) + (1-x)(306) = 250.

X=.33

So, let’s assume subs are 1/3 “Yoga” and 2/3 “Spiritual Growth”

 

For the reasons explained in posts 38 and 41, I’ll assume Yoga CAC averages $35/sub and subs stay for 16 months on average, and “Spiritual Growth” averages $150/sub and subs stay for 36 months on average.

 

Q3 started with 170,000 subs and ended with 180,000.  So, here’s a rough estimate of what you would expect Q3 CAC to have been based on the assumptions above:

 

YOGA

Starting subs:  56,100 [170,000*.33]

Churned off during Q:  10,500 [56,100 * (3/16)]

Ending subs:  59,400 [180,000 *.33]

Gross Adds:  13,800 [59400-56100+10500]

Total Yoga CAC:  $483,000 [13,800 * 35]

 

SPIRITUAL GROWTH

Starting subs:  113,000 [170,000*.67]

Churned off During Q:  9400 [113,000 * (3/36)]

Ending subs:  120,000 [180,000 * .67]

Gross Adds:  16,400 [120,000-113,000+9400]

Total Spiritual Growth CAC:  $2.46 million [16,400 * 150]

 

Total Expected Companywide CAC:  ~$2.9 million.

Actual Reported CAC:  $2.9 million

 

If anyone sees any math errors or obvious flaws in this model, please don’t be shy about pointing them out.

 

There are a bunch of assumptions in the analysis above, and it overlooks several important issues, like the difference between raw versus cohort churn rates in a rapidly growing sub base and seasonality in likely churn and adds between the two groups.  But I think this very simple model provides some comfort on CACs.  To the extent others are concerned that CACs are too high, it would help to know why you think that.

 

Also, showing that current CACs are in-line with expectations doesn’t show this is a good investment.  CACs are meaningless in a vacuum; they need to be compared to expected LTVs.  Management’s LTVs are inherently predictions about the future, and the bear/non-long case, as I understand it, is that management’s LTVs won’t hold up over time as customers leave sooner than expected because of competition and poor content.  I don’t think anything in the quarterly results sheds much light on that ultimate issue.

 

I note that the 1/3 Yoga, 2/3 Spiritual Growth split implied by the $250 average LTV (and confirmed by the rough CAC model above) is the exact opposite of the split reported in post #43.  It’ll leave it to those interested to determine what, if anything, that discrepancy means. 

 

EDIT:  On November 3,  @ArtkoCapital tweeted his own take that assumed much different churn and LTV numbers.  I don't know where he got his numbers from, but fair warning to all that the assumptions I used above about LTVs and churn rates could be way off.

 

 

[Homestead31]

 

So, let’s assume subs are 1/3 “Yoga” and 2/3 “Spiritual Growth”

 

 

 

The conference call was hard to understand at times, and the transcript isn't great.

 

it says:

Douglas Coburn

Got it. That makes sense. And the content that you're currently creating, is it mostly for Yoga or that you'd be costing pretty much across the board?

 

Jirka Rysavy

Made across the board, Yoga is not. Probably from usage on this side, Yoga is maybe 20%.

 

 

I was understanding "usage on this side, Yoga is maybe 20%" to mean that 20% of subscribers were yoga, and 80% were truth seekers.

 

i realize earlier in the question they were talking about content creation, but the word "usage" suggests what people are watching.

 

thoughts?

[KJP]

 

I was understanding "usage on this side, Yoga is maybe 20%" to mean that 20% of subscribers were yoga, and 80% were truth seekers.

 

i realize earlier in the question they were talking about content creation, but the word "usage" suggests what people are watching.

 

thoughts?

 

That exchange was very hard to follow, because, as you noted, the question asked about the type of content the company is currently producing and the answer referred to "usage."  My interpretation is that "usage" refers to the amount of time various categories of video are actually streamed by subscribers.  (One of the benefits of the streaming model is that the content provider has extremely detailed data on what subs are actually viewing.)

 

It appears that "Spiritual Growth" subs are more engaged than "Yoga" subs, so it would not surprise me if the percentage of "Spiritual Growth" video streamed exceeds the percentage of "Spiritual Growth" subs, and vice versa for "Yoga" subs.

 

Underlying all of this is an unanswered question:  How does the company put subs into the "Yoga" or "Spiritual Growth" bucket?  It may be that they have specific customer acquisition channels that target each group, and put people in those buckets based on the channel through which they were acquired.  Alternatively, there may be clear patterns of viewership in which some subs stream essentially only yoga, while others focus on the other content.  To my knowledge, the company has not publicly explained how they categorize people.  Indeed, I don't think they've provided any public breakdown or categorization of their subs, as opposed to percentages of video categories actually streamed.

 

The CAC model I posted above was based on the data provided earlier on this thread by Roark.  @ArtkoCapital's Twitter discussion of CAC appears to be based on an entirely different set of data.  I don't know his source or which set of data is more accurate.

[KJP]

Thanks for posting the letter.  Looks like the standard thesis for this company. 

 

I'm curious who's been selling in the 6's over the last month.  Anyone who didn't like the streaming business could have participated in the (undersubscribed) tender at $7.75/share.  There has been no really new information since then.  So why refuse to tender at $7.75 and then sell a few months later at $6.20?  Similarly, no news today, yet the seller(s) in the 6's appear to have been cleared out,and the shares are up 16%.

 

Now we're getting the other side of the coin, as the price has been pushed up to $10/share this morning.  So a greater than 60% move in three weeks, with the only company-specific news in between being exactly what one would have expected based on management commentary.  Taking advantage of this volatility is one of the benefits of small caps.

 

For whatever it's worth (and the opinion of a stranger on the internet shouldn't be worth very much), I've been trimming my position above $9.50.  Here's my back of the envelope math:

 

Assuming the cash and building are worth $80 million, here's what you're paying for the streaming business:

 

@$6.25/share:  $14 million

@$8/share:  $40 million

@10/share:  $70 million

 

For one way to estimate the steady-state value of the streaming business, see post 41 on this thread.  The "cost" of the streaming business listed above minus your estimate of steady-state value equals what you're paying for growth.  How much you're willing to pay for growth should be correlated with your confidence level that the company will grow profitably in the future.