Good afternoon, everyone. Thank you for participating in today's conference call to discuss Gaia Inc. financial results for the first quarter ending March 31, 2023. Joining us today are Gaia's CEO, Jirka Rysavy, and CFO, Paul Tarell. Following some prepared remarks, we will open the call for your questions. Before we get started, however, I would like to take a minute to read the safe harbor language. The following constitutes the safe harbor statement under the Private Securities Litigation Reform Act of 1995. The matters discussed today include forward-looking statements that involve numerous assumptions, risks, and uncertainties.
These include, but are not limited to, our ability to attract new members and retain existing members, our ability to compete effectively, including for customer engagement with different modes of entertainment, maintenance and expansion of device platforms for streaming, fluctuation in customer usage of our service, fluctuations in quarterly operating results, service disruptions, product risks, general economic conditions, future losses, loss of key personnel, price changes, brand reputation, acquisitions.
New initiatives we undertake, security and information systems, legal liability for website content, failure of third parties to provide adequate service, future internet-related taxes, our founders, control of us, litigation, consumer trends, the effect of government regulation and programs, the impact of public health threats, including the coronavirus COVID-19 pandemic and our response to it, and other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, including our reports on Form 10-K and Form 10-Q. Gaia assumes no obligation to publicly update or revise any forward-looking statements. With that, I would now like to turn the call over to Gaia's CEO, Jirka Rysavy. Please go ahead.
Good afternoon, everyone, I am glad that I can again report positive results. After the challenging last year when both revenue and adjusted EBITDA increased only in single digit due to COVID lockdown member cleanup, during the first quarter, we have returned to the member growth. Growth came from our direct membership, while the third-party providers like Amazon were still negative in January and February. We added 7,500 members during the first quarter, ending with 7,665 member on March 31st, with the growth accelerating during April. Even membership at our third-party provider started to grow again, and we expect member growth rates to increase during the year. The growth is also being helped by improved retention.
In April, the member losses hit all-time low, benefiting from our marketing focusing on campaign generating higher retention rather than mostly on cost of the trial and conversion rates. Another significant improvement become the cost per member acquisition that decreased by 13% during the first quarter as compared to fourth quarter.
Marketing investment in non-English, especially French and German, which have lower CPA and less churns, also helping. The viewing time per member started to grow again after declining since COVID lockdown ended. A lot of small improvements we did since September also start to make a positive difference. As we mentioned previously, we have eliminated over $5 million of annualized spending, which including approximately 36 headcounts, mostly contractors. They were added over the last two years to offset reduced efficiency we experienced as a result from work from home.
While some tail pay arrangement will still impact 2Q costs, we expect to see the partial benefits of some saving already in the 2Q. The 20% reduction in headcount return us to pre-COVID-19 level of operating efficiency, with annualized gross profit per employee reaching $600,000 in March. Now Paul will talk more about specifics results.
Revenues for the first quarter were $19.6 million, a slight sequential increase for the first time in the past 12 months, reflecting the return to growth in our member base during the quarter. Compared to the year ago quarter, revenues declined 10%, due primarily to Q1 2022 benefiting from the COVID-19-related growth of 2020 and 2021. As we continue to invest in and release new content, particularly to support our language expansion efforts, we have increased our viewership on the exclusive portion of our library to over 85%. As a result, and as expected, gross margins were 85.9% during the first quarter of 2023, and we expect them to remain at this level for the near term.
Total member acquisition costs during the quarter were $7.9 million or 40.7% of revenues, compared to $8.6 million in the year ago quarter. We have started to realize the benefits of our focus over the past several quarters with per customer acquisition costs down 13% sequentially and a similar improvement compared to the year ago period. While we continued to experience net member contraction in our larger third-party distribution partners in the first half of the quarter, we have returned to growth with our largest partner beginning in March.
The return of growth on both our direct member base and third-party member bases during the quarter is building our confidence that we are through the worst of the post-COVID unwinding. Selling and operating expenses, excluding marketing and member acquisition costs in the first quarter were $8.1 million, which is down slightly from the prior year. Corporate and G&A expenses in the first quarter were $1.8 million, which is in line with the year ago quarter. We have implemented significant cost reduction measures over the past few months, and as Jirka mentioned, we will begin to see the benefits starting in the second quarter of 2023. We had a net loss of $1.1 million or $0.05 per share during the first quarter of 2023, compared to net income of $0.1 million in the year ago period.
The decline was primarily driven by the reductions in revenues between periods, offset by a $0.8 million reduction in expenses. Adjusted EBITDA as a result, was $3.2 million in the quarter compared to $4.8 million in the year-ago quarter. With our return to member base growth during the period, our working capital benefited from a sequential increase of deferred revenue of $1.4 million, with our deferred revenues ending at $15.6 million as of March 31, 2023. We took advantage of this strong growth in deferred revenues to reduce our payables balance during the period by $0.9 million from December 31. We expect to continue to benefit from the inherent negative working capital cycle in our recurring subscription business model as we continue to grow our member base and revenues.
In addition, we will begin to benefit from the $5 million in reductions that Jirka mentioned during the second quarter, and expect to be in a position to generate cash flows from operations in excess of the cash flows we reinvest back into our content library and product enhancements going forward. Due to our in-house production capabilities and lack of contractual commitments tied to our content production, we have significant discretion in the amount and timing of this investment.
Flexibility allows us the ability to adjust our investment levels to withstand a further downturn in the macroeconomic environment if necessary. While we are focused every day on accelerating our growth rates and getting back to positive operating margins, we have made tremendous progress over the past several quarters on key areas of the business. With continued disciplined execution and the anticipated launch of the Gaia Marketplace in July, we are well positioned to continue growing revenues and cash flows going forward. With that, I will hand it back to Jirka for some closing remarks.
Yeah, we are on track to launch the Gaia Marketplace, which focus on existing members to increase our ARPU with minimum additional marketing expenses. Technology for it was finalized in April successfully, and offering will start next week and the launch should be in July as planned. For the summary, we have more cash than we borrow in our credit line, with the cash balance on March 31st being $10.8 million, and we expect the business to generate good cash flow for the remainder of the year. This conclude our remarks, so I would like to open it for the questions. Operator, please.
Thank you, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Mark Argento with Lake Street. Please proceed with your question.
Hey, Jirka. Hey, Paul. good to see a nice quarter out of you guys. Paul, could you just. You had mentioned deferred revenue was up. Could you just walk us through how the mechanics there in terms of as you're doing more direct versus third party subscribers. Then what's the mix of month to month versus prepaids?
Sure. That's a good, astute observation there. As we shift the member base growth from indirect members to direct members, we get the benefit of the negative working capital versus our partners collecting the money and then re-remitting it to us monthly. That's a good pickup there. In terms of the monthly versus annual mix, on our direct member base, we're about 50/50 of the existing member base between monthly and annual. When we look at our new signups, we vary between 25% and 30% of new signups that convert on the annual plan versus the monthly plan.
Got it. In terms of pricing, have you taken any price increases or done anything on the pricing side recently?
We have not, and I think as the world has unwound from COVID, we've been watching what other players in the industry are doing. We know from prior studies that we have some room, but I think consumer preferences and comfort levels are being tested right now as people are launching AVOD models, and Netflix is doing what they're doing with the password sharing crackdown. We're keeping an eye on it, and we definitely have the opportunity to move it up based on prior studies. I think we're just waiting to see how the macroeconomic environment plays out the rest of this year before we make a final decision.
One last one just on customer acquisition. Did you guys see, you know, better conversion as things kinda normalize a little bit out there? What are you seeing in terms of, you know, conversion or, you know, or cost to acquire?
Yeah. I think it's, as Jirka mentioned, we're less focused on the cost of conversion. We're more focused on retention, and the way that we look at that is one in three-month retention of our campaign. We're actually finding that it might make sense to pay slightly more for a given campaign based on how it retains, and then conversely, it actually makes sense to cut efficient, you know, measured by conversion rate and CPA campaigns because they're not retaining as well as the other campaigns. That's really. We started that about five months ago, and this quarter reflects the early benefits of that type of tweaking of what we're doing as it relates to our spending.
Yeah. As I said, you know, our cost per actually acquisition, not the conversion, but actually member decreased 13% from fourth to first quarter, which is very significant for us. It's definitely helping that our retention's better. As I said, the losses were the lowest in history of the company, so on a, you know, on a, the basis of %. I'll be very happy with the result. It's actually getting even better in April than in the first quarter. It's very encouraging what's happening kind of across the board for us.
Is that -13%, you know, per acquired customer, or is that 13% total dollars spent down?
Per acquired customer. The spend is flat, roughly.
Got it.
What we call CPA, cost per acquisition, it's, you know, we look at cost of the member when they, you know, to get somebody in a trial, but we're talking actually cost of customer after they convert from the trial.
Final for me on content, you know, what's the expectation in terms of, are you gonna spend similar to last year? How does that get moderated, if any?
Well, I think we look at it as a combination of content plus product spending that flows through the investing side of the cash flows statement. Part of the reduction that Jirka mentioned in terms of the contractor levels was on our development side, which was in that line. That number is gonna come down as it relates to the prior year.
As it relates to overall content spend as a mix of that line, we're really evaluating if we can continue to see this growth in our foreign language markets, we might accelerate our spending there. As I said in my prepared remarks, it's really up to our discretion of how we invest and at what levels we invest. If we keep seeing growth, we might ramp up content, and if the macroeconomic environment deteriorates, we have the ability to pull back.
We generally try to kind of peg the content to the revenues when we are running. As I said, you know, our viewing, the customer viewing start to grow because we used to grow, but through the COVID, but after the COVID ended, obviously as people start to not be home, the viewing declined, but it started to grow again first quarter. It's a much better you know, benchmark to kind of look at new content. Generally, we try to peg it to the revenue.
Great. That's helpful. Appreciate it. Good luck the rest of the way, guys. Thanks.
Thanks, Mark.
Our next question comes from the line of Thierry Wuilloud with Water Tower Research. Please proceed with your question.
Thank you. Hi, Jirka. Hi, Paul. Nice quarter. Mark covered a few issues, but maybe just a couple more, maybe a bit more color. The acquisition cost being down, are you just having more success with the existing marketing strategy, or did you change something and are able to be more effective with the marketing dollars?
I think it's a combination of being more effective with the marketing dollars and the channels that we're already spending in. As we said, looking at it from that campaign dynamic perspective and not just what's the cost and volume of acquisition, but what's the retention. That's obviously helping as we tune that. Secondarily, we're always testing and evaluating new platforms and channels to market as we continue to try and drive growth, particularly given the privacy changes and how that's impacted marketing kinda writ large online. That's not gonna change. It's only gonna continue to become more and more challenging to use targeted or hyper-targeted marketing to go after customers as people pull back on their availability to share data.
We also had several new people in marketing, especially the leads. They start to imply their creativity. I think that plays also the role. I think it's also credit to the people.
Great. A somewhat similar question about retention. Is it the new program that you've introduced? What's the breakdown between that versus maybe, you know, you lost a few members last year, now you have the hardcore members who are not gonna go anywhere. What's the breakdown between actions you made versus an improvement in the kind of in the quality of the existing members?
Well, there are really two things. I mean, first, obviously, we had a very challenging microenvironment. It wasn't just us, pretty much anybody on streaming. You know, people who we get during COVID, they were leaving. It was, like, industry-wide. That kind of ended by end of the year, actually kind of start to really, you know, come down in fall, late fall. By end of the year, most of that was over. There were some other still aspect at the beginning, first couple of months, like the third party, like Amazon, because they make a price change on their own, so they probably kind of added to it. That trend is kind of gone for us. At least we don't see that anymore, so it's kind of normalized.
I think biggest impact is that we start to focus on the campaigns, they have higher retention. We created a new algorithm that not only cost on the conversion and acquisition, I mean, cost of trials, but mainly eliminating campaign. They might be efficient, but they didn't lead to longer retention. That was probably the main change we did as Paul said in fall, I mean, like, kind of late summer actually when we started, and it's really paying a good dividend. I think that's the main driver behind it.
Yeah. We're always tinkering, if you will, for lack of a better term, on our payment processing infrastructure and working to optimize the passive losses that we get from credit cards on file being unsuccessfully charged, particularly with annual members. That's kind of the bread and butter of what we focus on with our existing member base, because losing those people isn't an active cancellation. That's really just a credit card going stale. We're starting to make improvements on that line as well. When you think back to what I said about what our composition of monthly versus annual members is, every percentage point improvement we can make on those passive losses is gonna compound as we increase the volume of annual memberships.
Okay, great. Paul, a question for you. The severance costs, were they expense in the quarter, or is that spread over time?
It's spread over time. The way that they're accounted for it, they basically have to continue to abide by the rules of the agreement. We hold the payments back and then pay them. We didn't do an accrual. Given the fact that the majority of these were contractors and they just needed time to wind down on their notice periods with their underlying contracts, it's not so much severance as it is just a timing artifact of when we let people know.
Oh.
How those contracts wound down.
Yeah. Some of the contractors we work through companies, especially the outside of U.S., when we have a commitment, if we have to give them notice before we can terminate. I mean, we give them, you know.
Yeah.
commit it to end of the contract. Not end of the contract, but there is a notice period, so we have to pay them through the notice period.
Okay. Maybe the last question on any incremental color on the Gaia Marketplace in terms of, are you getting a sense for the service providers, how they're responding, how they're gearing up for that? I'm wondering if you have any color around that.
I think that would be more question for first quarter. We just finished like, a week ago our technology, be glad that that was done on time because we kind of.
Okay.
Wanna be done by in April. It's basically it's working. We have it effectively live, but we didn't start selling the product. You know, if you go on that site, you have basically just for right now, just Gaia branded merchandise and stuff. We have something working and tested, but I cannot really say on the providers yet.
Okay.
It's kind of definitely challenge. I kind of see that very positive. It's just another part is I kind of see that a lot of things would actually happen from the cost or retention and all that stuff start to get positive. I feel very good about where company is.
Great. Well, nice to see the inflection point in the, in the member counts. That does it for me, guys. Thank you very much.
Thank you.
Thanks.
At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Rysavy for closing remarks.
Well, thank you everyone for joining. We look forward to speaking with you when we will report our second quarter at, which will be like early August. Thank you very much.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.