GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX

Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.

 

According to Steve Frankel (with whom I used to do business) at Dougherty & Co., GAIA “began to aggressively ramp its customer acquisition in the fourth quarter of 2016, with a goal of reaching 1M subs by the end of 2019. Customer acquisition costs increased from $4.5M (95% of revenue) in the fourth quarter of 2016 to $7.3M in the fourth quarter of 2017 (87% of revenue). However, increased traction with consumers and the growth of organic web traffic has enabled Subscriber Acquisition Costs (SAC) to decline from $108 (per subscriber) in Q416 to $81 in Q417.

For this, GAIA receives a lifetime value (LTV) of “roughly $150 – $180 for yoga-focused subscribers and about 2x that level for those focused on the content in Seeking Truth.”

Also, “Currently, Yoga and Transformation each account for 35% to 40% of the subscriber base with Seeking Truth representing the balance.”

So, all three areas are approaching parody. Thus, the blended LTV is likely halfway between $150-180 and $300-360… about $250. That implies that the average subscriber remains a subscriber for about 2 years ($247 divided by $10 per month), so I’ll round this number down to $238.80 (2 years at $9.95 per month).

So, GAIA is making $238.80 minus its acquisition cost of $81 per customer. That’s $168.80 of profit for each of its 400,000 subscribers (as of the end of February).

Of course, we also have to subtract its per-subscriber cost of goods (COGS) and G&A expenses – basically what they spend to support their customers.

COGS was about $11 million last year, but we have to consider that content created this year will still be useful for several years into the future. So, let’s conservatively allocate half of that cost to existing customers (so, $5.5M).

Corporate, general and administration for the past year was flat at $5.5 million. So, that’s $5.5M + $5.5M = $11 million in customer servicing costs. The average subscriber count was about 325,000 over that time frame, so the average customer currently costs GAIA about $35 per year to support.

So, they spend about $70 (and falling as they grow, thanks to their economies of scale) to service a customer over the course of their 2 year average life. This nets them a pre-tax profit of $168.80 – $70 = $98.80.

That’s a very nice ROI on their $81 investment… 131% annualized (see below).

GAIA CAC & ROI

Strong LTV vs. CAC — the true litmus test of an incredibly successful subscription business.

So, why has the company been showing a loss?

Simple. VERY simply, in fact…

Since they’re making so much profit on each customer (as shown above), GAIA continues to pour more and more money into marketing. As it says in their 10K, “Selling and operating expenses increased $19.0 million, or 76.0%, to $44.0 million during 2017”.

Their net loss was $23 million, so we can envision what would have happened if they didn’t invest that $44 million into marketing.

However, we want them to invest (in fact, more) into marketing (until the ROI becomes unattractive). If you offered me predictable $116 profit on an $81 investment, I’d be all in… and this is exactly why GAIA is increasing marketing and raising money (presumably to invest more). They should keep cranking up the marketing expenditures, until they are only making less than their weighted average cost of capital.

Their WACC is well below 15%, but I used 15% to calculate their maximum prudent CAC (in order to have some breathing room). I came up with $147.18, nearly double the current levels.

GAIA CAC & ROI2

Of course, this is all quick, back-of-the-napkin math… but it’s close enough. Feel free to chime in if you feel inclined to refine this. Either way, it’s indisputable that this is the reason why GAIA was able to do a round of funding some 20% above where the stock was the month before… and immediately traded higher, not lower.

 

How does this compare to MoviePass?

We can jump right to the punch line, because anyone invested in HMNY knows how its rounds of funding have gone: down before the round, weak deal terms, and a sharply falling stock thereafter.

As for the CAC calculation, this is more of a challenge. MoviePass has a two-phased end game. How much they make or lose per customer now is vastly different than how much they’ll make or lose when/if they gain the critical mass needed to truly influence a meaningful percentage of market participants. So, for now, investors are being asked to accept big losses for the promise of big profits later.

Interestingly, we do know that both services charge a similar fee. GAIA charges $9.95 per month or $7.95 per month via an annual subscription. MoviePass charges around $7.50 on the annual plan after accounting for its processing fee (GAIA doesn’t charge a processing fee).

From a customer acquisition perspective, the key difference between GAIA and HMNY is that GAIA spends about $3 to service/support each subscriber per month after spending the initial $81 to obtain them. $1.50 of it is spent on content (the rest is spent on supporting the customer — delivering content, customer support, and internal accounting, etc.).

In contrast, HMNY’s content resides at the cinemas and they pay full price on most of the tickets for their customers to go (currently an average of about $11 a pop).

Big difference.

Of course, HMNY plans to close that $9.50 difference over time by gaining more influence over the studios, cinemas, etc. However, in the meantime, they are footing significant upfront expense in hopes of reaching that next level.

To understand HMNY’s metrics better, I recommend (again) reading “MoviePass. Premature Scaling?”. If you don’t understand the concepts discussed there, you cannot possibly understand HMNY’s situation… and this is the difference between professional investors, who have shied away from HMNY and retail investors who continue to argue in its favor.

The simple fact is that the metrics are not conducive to attracting institutional investment. Otherwise, perhaps Mark Cuban would have made an investment in MoviePass as part of his theaters’ agreement with them this week. Instead, investors quickly faded yesterday’s move and drove the stock even further down on Wednesday. Without institutional support, HMNY simply won’t be able to raise the funding necessary to make it to that magical “next level”.

I’ve said it before – many things are possible if you have enough capital to build the scale… but very few companies can attract the required level of capital. This is where MoviePass is struggling and I don’t see a remedy in sight.

The biggest problem is that the business model has not been showing the progress that we were promised. In fact, each month seems to bring a new hit to the long-term thesis. First, they said that $9.95 was ideal. Then, they lowered prices. First, they said that utilization would drop quickly. Then, it didn’t / hasn’t. First, they knew everything about us (many of us knew otherwise). Then, they were forced to retract.

Because of all this, their CAC has risen, their loss-leading subscription business has proven more “loss” than “leading”, their “Night At The Movies” vision has been killed, big (or even medium-sized) theaters aren’t signing up, big studios aren’t paying for more than cheap advertising, and forget about the credit card idea because Amazon and others are upping their game for a higher-level purpose — to gain access to our purchasing data.

High CAC, low LTV, and an eroding vision. Not good.

However, for some retail investors, the old saying remains apt: “Hope Dies Last”.

Unfortunately, time is running short. The summer movie gauntlet is around the corner. Meanwhile, Howard Lindzon said it best when he astutely observed that “rising rates matter for ‘growth’ stocks with no path to profitability”.

These factors will likely serve as the ultimate litmus test of how MoviePass gets funded with HMNY shares sitting at these levels.

 

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Disclosures / Disclaimers: I am long GAIA. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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18 thoughts on “GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX

  1. How do u think $HMNY next round of funding comes about? Can’t see too many investors wanting to participate in light of the stocks action after the last secondary offering. Any chance they just implode as they simply can’t access further capital in the next 90 days?

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    1. No… I think they’ll get another round done (with a big discount and warrants again).

      They just won’t have as many takers, because the last round likely didn’t work out for most of them despite the discount.

      That’s worrisome for how much they can raise now and how many more chances they get before they can’t raise enough to keep things rolling.

      Liked by 1 person

      1. I think thry’ll have to do a convertible deal, sure, it’ll kill the share price as it would have to be done around $2-$2.10 and a coupon around 6%, which will cause all buyers to short against the box and earn 6% for 5-8 years, otherwise I don’t see how they raise much more $$…thoughts?

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  2. Granted…that 153 mil loss is for the full year but most of it came from Q4. People keep saying the loss was really only 51 mil from operations. Imo a loss is a loss and it doesn’t matter where it came from just because it didn’t affect your cash.

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    1. Then you do not understand income statements and how they relate to cash flow and balance sheets. Either that or you are choosing to pretend you do not.

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      1. Was that a barb? I guess maybe. I do not like to see cheerleading against the company. Not cool.

        On to your point – Not sure we can figure it out without the soon to be released 10k. I am not very knowledgeable about the math behind derivative expenses as it relates to corporate financing.

        Liked by 1 person

        1. Not my forte either, but one of my mentors is a whiz at it.

          To me, the most important things remain 1) their operating model / cash burn and 2) their ability to raise cash on reasonable terms.

          If these two things aren’t playing nice together, the stock absolutely positively cannot work… so no other argument holds much (if any) weight as compared to these two.

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  3. Curious / skeptical of your conclusions about a number of points on GAIA.

    1. Let’s stipulate that average customer life is 2 years. Does that not imply churn of roughly 50%? (1/Average Life)
    2. If churn is 50%, there is no way that CACs are $81 as held out by the analyst @ Dougherty. Would be closer to $100.
    3. The $44 million of “Selling and Operating” is not fully variable. GAIA reported marketing/advertising spend of $26 million in note 1 of their 10-K. This figure matches with the “percent of revenue” approach that the company began reporting several quarters ago. The balance of $18 million includes a number of fixed operating costs (customer service, accounting, IT, HR, finance, legal, etc.). The $5.5 million reported as “Corporate general and administrative” is solely salaries for Jirka (CEO) and Paul (CFO). I believe the notion that the company can simply shut off the tap to this $44 million is inaccurate.

    How accurate do you think this view is…that the company churns half of its customers each year, spends $100 in CACs, and doesn’t have discretion over a large portion of selling and operating expenses? If you run numbers based on these metrics, going back to early 2016, you’ll see the company’s cash balance (post-tender) running out by the end of this year….making the equity raise a “need to have” not a “nice to have.”

    From 4Q’17 Transcript:
    “Paul C. Tarell: So selling and operating includes all of the overhead, salary and overhead of our marketing team, our public relations team, our operations team, our merchandising team, our customer support team. So today, we have about 130-ish employees and I’d say the majority of those employees end up in that line. When you look at the corporate line that really just covers Jirka and myself because we do operate very lightly from a corporate-infrastructure perspective. So that’s the majority of that, the remainder of that line. “

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    1. I will review this tonight. I would say that your definition of churn is off, but you make a good point with regards to expenses. Again, I’ll check it out tonight. Thanks for the input!

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  4. Thanks….yes I would appreciate some better insight into churn. Frankly, I’m new to this business model. What is wrong with the below math?

    1. Company spent $26 million on direct customer acquisition costs in 2017. (Stated by the company as % of Revs and in note 1 to 10-K)
    2. Assume company spends $81 per sub, or ~32.5% of $250 LTV (in-line with Dougherty analyst)
    3. This implies gross adds of 321,000 ($26 million / $81 per sub)
    4. We know net adds during the year were 162,500 (begin at 202,000 and end at 364,500).
    5. Difference between implied gross adds and known net adds is 158,500 (364,500 – 162,500)
    6. As a percentage of beginning of year subs, churn is somewhere in the range of 75% (158,500 / 202,000)

    The only way churn comes down towards the levels implied by a lot of people following the stock (low to mid 30% range) is CACs closer to $115, or 45% of $250 LTV. This percentage is not inconsistent with management commentary either. From 3Q’17:

    Paul Tarell: “As we look across the channels, obviously, Yoga, Seeking Truth and Transformation, we continue to spend well under the 50% of lifetime value that we’ve internally set and on a blended average, I’d say we’re probably closer in the 40% range right now when we look across.”

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    1. I think you would really benefit from a conversation with their investor relations representative. You’ve got a strong interest and desire to understand. That’s half the battle 👍🏼

      Like

  5. Naturally. But any thoughts / responses would be much appreciated is you have time to turn your mind to it. Thx.

    Like

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