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Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Equity Bottom-Up

<h3>KEY POINTS</h3>
<div></div>
<ul>
<li>Gaia reported second-quarter revenues of $20.7 million, up 7% Y/Y. The ending member count of 792,000 was up compared with 770,200 a year ago, but down versus the first-quarter ending member count of 823,000. Nevertheless, the company delivered its eighth consecutive quarter of profitability, with strong adjusted EBITDA of $4.4 million, demonstrating the resiliency of its financial model.</li>
<li>Management felt it had good success in attracting attention and interest from new potential members but converting them from the free trial stage to paying members was more difficult than in recent quarters, reflecting the typical seasonality of the streaming business. Management indicated that such seasonality had been temporarily suppressed during the last two years, probably due to the COVID-19 environment, but it clearly came back this quarter, an observation confirmed by the results reported by other streaming companies.</li>
<li>This reduced conversion rate negatively affected the return on marketing investment and management decided therefore to reduce marketing spend with a view to reaccelerate marketing activities toward the end of 3Q22 and 4Q22.</li>
<li>Management is encouraged by the resumption of Events+ after the COVID-19 hiatus. Events+ can create premium content that has the potential to raise overall member ARPU.</li>
<li>Gaia maintains a very attractive financial profile with a debt-free balance sheet, strong gross and EBITDA margins, and positive net income. It is unusual to see businesses with such financial characteristics trade at Gaia’s very modest valuation multiple (less than 1x Enterprise Value to Revenues).</li>
</ul>
<h3>OUR INSIGHTS</h3>
<h2>The Opportunities</h2>
<p>Gaia has a strong position in its niche streaming market, with a substantial existing subscriber base, a strong content library with more than 10,000 titles with the majority being exclusive originals and a well-functioning production capability able to cost-effectively grow its content library. The company has a self-sustaining financial model and various avenues for growth, including growing its English-speaking subscriber base, growing its ARPU per subscriber, building up its presence in additional languages (Spanish, French, and German), and adding to its subscriber base via opportunistic acquisitions. The company’s main content themes align well with an affluent and dedicated audience.</p>
<h2>The Obstacles</h2>
<p>The streaming market is competitive, although Gaia’s niche offering insulates it from mainstream competition. The COVID-19 crisis temporarily limited social interactions and therefore provided good momentum for all streaming businesses, but consequently, there could be some unwinding of that positive dynamic post the<br>COVID-19 pandemic stage.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Thierry Wuilloud, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Wuilloud and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS


Gaia reported second-quarter revenues of $20.7 million, up 7% Y/Y. The ending member count of 792,000 was up compared with 770,200 a year ago, but down versus the first-quarter ending member count of 823,000. Nevertheless, the company delivered its eighth consecutive quarter of profitability, with strong adjusted EBITDA of $4.4 million, demonstrating the resiliency of its financial model.
Management felt it had good success in attracting attention and interest from new potential members but converting them from the free trial stage to paying members was more difficult than in recent quarters, reflecting the typical seasonality of the streaming business. Management indicated that such seasonality had been temporarily suppressed during the last two years, probably due to the COVID-19 environment, but it clearly came back this quarter, an observation confirmed by the results reported by other streaming companies.
This reduced conversion rate negatively affected the return on marketing investment and management decided therefore to reduce marketing spend with a view to reaccelerate marketing activities toward the end of 3Q22 and 4Q22.
Management is encouraged by the resumption of Events+ after the COVID-19 hiatus. Events+ can create premium content that has the potential to raise overall member ARPU.
Gaia maintains a very attractive financial profile with a debt-free balance sheet, strong gross and EBITDA margins, and positive net income. It is unusual to see businesses with such financial characteristics trade at Gaia’s very modest valuation multiple (less than 1x Enterprise Value to Revenues).

OUR INSIGHTS
The Opportunities
Gaia has a strong position in its niche streaming market, with a substantial existing subscriber base, a strong content library with more than 10,000 titles with the majority being exclusive originals and a well-functioning production capability able to cost-effectively grow its content library. The company has a self-sustaining financial model and various avenues for growth, including growing its English-speaking subscriber base, growing its ARPU per subscriber, building up its presence in additional languages (Spanish, French, and German), and adding to its subscriber base via opportunistic acquisitions. The company’s main content themes align well with an affluent and dedicated audience.
The Obstacles
The streaming market is competitive, although Gaia’s niche offering insulates it from mainstream competition. The COVID-19 crisis temporarily limited social interactions and therefore provided good momentum for all streaming businesses, but consequently, there could be some unwinding of that positive dynamic post the COVID-19 pandemic stage.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Thierry Wuilloud, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Wuilloud and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Seasonality Is Back, Affecting the Member Count, but the Financial Model Demonstrates Resiliency

Building a Self-Sustaining and Growing Business in a Niche Streaming Market While Maintaining Financial Discipline and Steady Profitability

United States

Gaia, Inc. operates a global digital video subscription services company. The Company offers a digital content library on multiple internet-connected devices. Gaia serves customers globally.

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Gaia (GAIA US)

Seasonality Is Back, Affecting the Member Count, but the Financial Model Demonstrates Resiliency

KEY POINTS Gaia reported second-quarter revenues of $20.7 million, up 7% Y/Y. The ending member count of 792,000 was up compared with 770,200 a...

Water Tower Research

Building a Self-Sustaining and Growing Business in a Niche Streaming Market While Maintaining Financial Discipline and Steady Profitability

KEY POINTS Gaia has built a substantial streaming business for consumers interested in yoga, spiritual transformation, truth-seeking, and...

Water Tower Research

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