Jirka Rysavy - Chief Executive Officer Paul Tarell - Chief Financial Officer

Mark Argento - Lake Street Capital Markets Peter Rabover - Artko Capital

Thank you, Bethany, and good afternoon everyone. So our fourth quarter results ended again ahead of our expectations.

Paid subscribers grew 80% to 364,500 from 202,000 at the end of 2016, which is achieving our growth rate acceleration target, which was set up 18 months ago. The subscriber growth rate increased sequentially 700 basis point from 73% at the end of third quarter and 2,800 basis points from 52% at the end of last year.

Revenue in the quarter increased 77% from the same quarter year ago and streaming revenue increased 94%. Gross margin grew 50 basis points for the quarter to 86.2%, and 260 basis points for the year.

We have again maintained our investment discipline and even with additional acceleration of our subscriber growth, we kept our loss below both our plan and the last previous quarter. Our personalized experience for each subscriber and the increased sophistication of using organic marketing, including increased leverage of search engine optimization, contributed again to our over-performance.

Our customer acquisition costs remained flat, which helped to reduce our net loss for another sequential quarter. I will let Paul speak to more about the quarter result.

Paul?

Thanks, Jirka. Jumping right into our results.

Streaming revenues in the fourth quarter increased 94% to $7.9 million compared to the year ago quarter due to the continued strong subscriber growth Jirka just highlighted. In 2017, streaming revenues increased 78% to $26.2 million.

Gross profit in the fourth quarter increased 78% to $7.3 million compared to $4.1 million in the year ago quarter. As Jirka mentioned, gross margin increased 50 basis points to 86.2% from 85.7% in the fourth quarter last year.

The increase in gross margin has continued to be driven by increased revenues and lower per subscriber costs to deliver our service, including lower streaming costs and higher leverage on our historical media library investments. For these same reasons, full year 2017 gross profit increased 69% to $24.4 million and gross margin was up 260 basis points to 86.1%.

Total operating expenses in the fourth quarter were $13.4 million compared to $9.4 million in the year ago quarter and $12.3 million last quarter. This was ahead of our expectations due to increased efficiency in our customer acquisition efforts, particularly considering our accelerated sequential subscriber growth.

The year-over-year increase was due to the continued acceleration of subscriber growth rate during 2017. On a full year basis, operating expenses increased to $49.5 million compared to $31 million in 2016, again driven primarily by our increased spending on customer acquisition to drive our annual growth rate from 46% in the third quarter of 2016 to 80% in the fourth quarter of 2017.

Customer acquisition costs as a percentage of revenue declined to 87% in the fourth quarter of 2017 from 95% in the same year ago quarter, despite the dramatic increase in subscriber growth rate as previously mentioned. It's important to reiterate that we include all marketing expenses in these numbers, including the cost of launching our foreign language offerings.

We also like to expand subscriber acquisition costs in the period incurred and despite the significant life time value, do not record any value of our subscribers on the balance sheet. Net loss from continuing operations in the fourth quarter was $5.6 million or $0.37 per share compared to a net loss from continuing operations of $3.4 million or $0.23 per share in the year ago quarter.

In 2017, net loss from continuing operations was $23.7 million or $1.57 per share compared to a loss of $10.8 million or $0.54 per share in 2016, which reflected the $114.5 million gain on the sales of Gaiam branded business and the repurchase of approximately 40% of our outstanding common stock in July of 2016 at $7.75 share. On December 31, 2017, we had $32.8 million in cash, which included $12.5 million in borrowings under a line of credit that we put in place secured by the equity in our 12 acre 150,000 square foot campus.

We have included the balance due on the line in current liabilities; although, the contractual maturity is not until December 2020. With that, I would now like to turn the call back over to Jirka for some additional remarks after which we'll open the call for questions.

Jirka?

The momentum in our business has continued to strengthen as we accelerated subscriber growth, while customer acquisition costs continued to track below plan. During the quarter, we also grew our geographic footprint with subscribers now in over 170 countries.

We have expanded Gaia in Spanish, we launched Gaia in German, and also recently in French. Our subscriber count is now three times higher than during the third quarter of 2015 when we operated profitably, but we only were limited to 20% revenue growth.

As discussed, we have successfully achieved our first goal, which was set 18 months ago to accelerate our subscriber growth to 80% by the end of 2017. Our next goal, which was also set 18 months ago, is to reach million subscribers by end of the next year and to operate profitably thereafter.

And with that, I'd like to open the call for questions. Bethany, operator?

Just a couple of quick ones, first off in terms of expectations for growth in 2018, I know you have lot of control over the levers in terms of the subscriber acquisition growth. Any initial thoughts on what you're thinking about for '18 relative to the 80% or whatever ended up been for 2017?

I think for us right now, we going to focus to hit million subscribers by end of the next year, so you can calculate that. We probably would tend to grow a little higher to start.

But generally, the goal is to hit million members and optimize the quarters as the market allows.

And then in terms of the -- any updated kind of life time value or churn or any trends anecdotally you could talk about in terms of subscriber growth?

We said it in the call, the acquisition costs continues to drop quarter-to-quarter. The life time value is growing, all for us pretty consistently, which also for company of this size you would expect that because as we have more mature people in the pool that will drive the value.

But if you look on our mature customer, the annual life time value, it's growing on its own. So you have those upsides.

So the dynamics on numbers they're actually doing really well and as soon we get to our million and we can grow more in a profitable range, it'll show very dramatically.

And then just lastly from me. I know in the prepared remarks, Paul, you had mentioned that you guys drew down on a line to your real estate.

What availability on that line and maybe the terms of it?

That'd be filed in the K tomorrow we included the full agreement there. But generally, it's $13.5 million that drops down every six months with the full balance due at as I said December end of December 2020.

We drew on it to just make sure that line is in the place, to typically do it. It's not currently outstanding.

So we just put in the place as now we can also obviously increase the line and/or do sales leaseback in headquarters as always planned.

I had a question, I mean I feel like I ask this every quarter but I keep getting confused. So your SG&A was 12.168, and based on your reporting that you had you said your acquisition costs were 87% of revenue, so that's about 7.3.

So I guess I am trying to figure out that balance, that $5 million balance. What goes in that bucket?

Do you mean like our salaries?

Yes -- that was on the corporate…

So this is a good question, because we do get it fairly often. So selling and operating includes all of the overhead, salary and overhead of our marketing team, our publishing team, our operations team, our merchandizing team, our customer support team.

So today, we have about 130ish 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 the that the remainder of that line.

Also, in that number, in that percentage 87%, there's a pretty big high chunk because for the languages because as we did, especially around our German and French. Again, we all hit marketing expenses.

We don't have those subscribers yet, but we expense all of that in that line, because by accounting for media company, if you change the existing titles to the other languages, you take a P&L upfront and we take it in marketing line.

That was actually -- I think that’s what I was driving at that. So that 87% include the launch of the foreign language or so.

Is that what you're saying?

Yes.

So the other line that you have mentioned with the salaries that 5ish line, that's for the study that shouldn’t fluctuate but the 7.3 would be actually going down, going forward, because you included things that aren’t actually customer acquisition costs in there. Is that the way to think about that?

Yes, with one probably caveat. I don't know that it's going down, because if we continue to drive at the higher growth rates that we're talking about the absolute number of dollars that we have to spend, continues to grow even as a percentage of revenue decline.

Just that's the one caveat.

It really inclined as a percent of revenue, there's basically -- if you look the leverage on company on cost of people, so if we look at it at like $20 million if we grow revenue 10 times, our cost of employment will grow less than one time, so very leverageable. You have probably 11, 12 times leverage.

So that would still make the other expenses grow, but very lightly compared to other -- compared to revenue. We probably get to like $1 million per employee, which is more like Google or Facebook numbers.

Maybe a little backward question, I think you guys have talked about this number in the past, but I just want to make sure that's true. So what would your growth be this last quarter if you just decided to be like a breakeven business?

But it's probably around 20%, I think you had mentioned?

That was in 2015, it'll be more today.

Yes, we haven't looked at that number specifically, because we're focused on hitting that -- we were focused on hitting the 80%. But every 100,000 incremental subscribers we add raises that number meaningfully.

We’re obviously staffed to support 80% growth. So I don't have exact number for you, but it is higher than 20% today.

It probably the -- we've say big picture, because there's other things happening what we're launching. But if you save as with million sub, we can probably grow 40% profitably.

Thank you, Bethany, and thank you every one for joining. And we look forward to speaking with you when we report our next quarter in early May.

Thank you.