Beachbody: Running Dangerously Low On Cash
***Follow-Up Comments – August 20, 2024: Beachbody was my first short-selling article, written a little over two years ago, in July 2022. The initial idea for my project was to research and write about companies whose stock prices could decline due to upcoming fundamental underperformance. I developed a filter based on companies that failed last year, tracked their performance and financial ratios back to a year prior to their failure, and then identified if any currently traded companies exhibits similar characteristics.
Since then, many things have happened, and I completely forgot about my project, Beachbody, and even my Substack account. This is my first time back in over two years, and it’s great to see that my forgotten idea has worked so well, with Beachbody’s stock down over 95% since the publication of this article.
I hope you’ve enjoyed the article. Stay tuned for what’s next!
Introduction:
In this article, I will begin with an overview of The Beachbody Company’s (BODY; “Beachbody”) business and how it generates revenue from its various segments of operations. Then, I will perform a “best-case scenario” cash flow forecast, assuming that the company will achieve its cost-saving objectives and hit its absolute dollar-savings target of $110mm compared to prior year spending by the end of 2022. The best-case scenario forecast also assumes an improved and supportive macro-operating environment in order to highlight how even under a prime operating environment, Beachbody is still running dangerously low on cash required to sustain its day-to-day operations within the next 2 quarters.
While management has repeatedly affirmed that there are no issues to the company’s current liquidity, despite skepticisms raised by analysts during Beachbody’s latest earnings call, capital raising efforts either through debt or equity is likely imminent to avert the risk of failing the business. Investors should be aware of the risks and impacts of Beachbody’s liquidity position, as capital raising under the current macroeconomic backdrop (i.e. high borrowing costs; volatile markets) or continued refusal by management to acknowledge the company’s potential cash crunch over the next two quarters could potentially erode shareholders’ value.
What Is Beachbody? And What Do They Do?
Beachbody was founded in 1998 by Carl Daikeler and Jon Congdon in California. Daikeler was previously in informercials for Lifeline Gym in California. The founders received $500,000 from angel investors, and they used the funding to develop a series of workout videos and bought the website of Beachbody.com.
In 2005, P90x, created by Tony Horton for Beachbody as a home exercise regimen, received major commercial success. It was an at-home training program that utilized cross-training and periodization, combined with nutritional and dietary supplements. P90x was heavily marketed through infomercials and celebrity endorsements. Daikeler and Congdon had initially used their own before and after photos to show results from using Beachbody’s program. But once P90x gained a significant user and following base, the founders began to use customers’ before and after photos as advertisements.
In Beachbody’s 2021 annual financial statements, it stated that the company had built and used social platform[s] as “an incentive [for members] to invite people to participate in groups and [to] increase [the company’s] customer base”. Beachbody’s customers and coaches are encouraged to introduce the company’s products to others. In return, customers and coaches earn shares of revenue generated from promoting the Beachbody products. Coaches also earn compensation for converting their customers into coaches who will then proceed with developing their own network of customers.
Beachbody’s core business model has been susceptible to multilevel marketing and other malpractices in recent years. An example would be in 2017, when an advertising watchdog organization, Truth in Advertising, found Beachbody distributors making false and unsubstantiated income claims in order to promote the company’s business opportunity.
Beachbody was and is facing several lawsuits:
Beachbody was alleged of charging customers’ credit cards on automatic, recurring basis without written consent of those customers:
In 2017, Beachbody agreed to pay $3.6 million to settle a lawsuit from the city of Santa Monica over automatic credit card renewals. It was alleged that Beachbody was charging its customers’ credit cards on an automatic, recurring basis without the required written consent of those customers.
An article in 2020 disclosed that Beachbody was facing a class action lawsuit because they allegedly disclosed customer information to third parties without consent:
Plaintiff Heather W. Carbone says the company sells, rents or otherwise discloses the personal information, transaction and viewing history of its customers to various third parties in order to supplement its revenue, thereby violating the Video Privacy Protection Act (VPPA).
On April 5th, Purcell & Lefkowitz LLP is investigating the Beachbody Company for potential breaches for fiduciary duty by board of directors.
While Beachbody’s controversial business body has been a key focus area for investors, our analysis today will focus on the business’ fundamental performance and liquidity outlook instead.
How Does Beachbody Generate Revenue?
Beachbody operates and generate revenue through three main business segments: digital subscription, nutritional products sales, and connected fitness.
The Digital Subscription Business:
For the digital subscription business, Beachbody operates through mainly Beachbody on Demand (BOD), Open Fit, and Beachbody on Demand Interactive (BODI). Beachbody launched BODI, an interactive premium subscription in 2021. And Open Fit has since merged under the BOD platform due to its recent one brand strategy in 2021.
BOD is a digital platform and one-stop-shop for all fitness and nutritional media contents. BOD is stream-able on web, Beachbody Bike (also known as Myx), iOS, Android, Roku, and Comcast, etc.
Meanwhile, Open Fit is a streaming platform with celebrity influencers and a team of certified trainers leading live small-group training sessions while giving real-time feedback, motivation, and instructions.
Beachbody’s Digital Subscription Business generated revenue of $94mm, $94mm, $82mm, and $82mm for Q2 2021, Q3 2021, Q4, 2021, and Q1 2022, respectively, which represents y-o-y revenue growth +20%, -5%, -14%, and -14%.
The sequential decline in Q1 2022 digital subscription revenue was due to the re-bucketing of $8.7mm revenue associated with preferred customer membership programs to nutrition and other revenue. The preferred customers were previously classified as coaches. An additional loss of $4.6mm in revenue were due to a decrease in sales generated from its coach business management platform as a result of fewer coaches and decrease in VIP early access revenue.
Nutritional Products:
Beachbody offers nutritional products and supplements, which are often bundled and sold with digital subscriptions. Nutritional products offered by Beachbody includes Shakeology, Beachbody Performance Supplements, Beachbars, and others.
In the company’s pre-merger investor presentation, Beachbody estimated its 430,000 subscribers in nutritional products will generate $560mm in revenue by 2021. However, since the company went public via a SPAC reverse-merger last June, nutritional products segment revenue has steadily declined. The segment’s revenue for Q2 2021, Q3 2021, Q4 2021, and Q1 2022, were $128mm, $108mm, $98mm, and $98mm, which represents to y-o-y declines of -8%, -29%, -25%, and -25%, respectively. TTM revenue for the nutritional product segment sums to $432mm, which approximates to 2/3 of what was originally guided by management. Gross margins for the segment printed an average of 53% for last four quarters.
Connected Fitness:
For Beachbody’s connected fitness segment, the company made entrance into the offering through its Myx fitness acquisition in June 2021. The Beachbody Bike (previously known as Myx) is a physical indoor bike equipment fitted with a touch screen that allows users to stream and engage in digital content offerings by Beachbody.
In the company’s pre-merger investor presentation, Beachbody estimated the Myx segment to deliver $100mm in revenue for 2021. However, the company has only delivered $42mm for FY 2021, which is 58% shy of its original target. Gross margin for the segment was at -56%, meaning every bike has been sold at significant loss before considering other overhead costs.
Analyst John Heinbockel from Guggenheim partners shared a similar concern and asked if it is possible for the company to dispose or sell their onerous indoor bike investment after only two quarters of operations:
Okay. and may be secondly, right…so you think about the Connected Fitness business, is there an opportunity to somehow partner with hardware providers to basically get out of the bike business, right? Your strength is content, maybe somebody else's is the hardware partner with someone to do that. I guess that could be done on bikes or I'm ready to deliver your content, bikes, treadmills, anything. Can you do that?
Beachbody May Be Running Out of Cash
In Beachbody’s latest Q1 2022 financial results, the company sustained a -8% q-o-q decline in its topline, which is consistent with multi-period sales decreases observed across all of its three core businesses as outlined in the foregoing overview. Overall gross margin was 47%, a slight increase from 45% in Q4 2021, or a 4% improvement. After incorporating operating expense such as Selling & Marketing (S&M), Technology & Development (R&D), and General & Administrative (G&A), as well as restructuring costs, Beachbody’s operating margin totalled -37% for the first quarter, and sustained net losses of -$73mm in the period.
This poor operating performance translated to -$33mm in net cash used in operating activities after adjustments for non-cash items during the first quarter. And the company spent an additional -$12mm in purchases of property and equipment (PP&E). Net of proceeds generated from 1) the exercise of stock options, and 2) the remittance of taxes withheld from employee stock options, Beachbody incurred net change in cash of -$44mm. This decreased the company’s cash and cash equivalent on its balance sheet to $63mm in Q1’22 from $104mm in Q4’21 and $347 in Q2’21 following the completion of its SPAC reverse merger.
Beachbody has engaged in restructuring and cost-saving initiatives since fiscal 2021. Management is set to decrease costs through 1) the previously mentioned one brand strategy under its digital subscriptions business, alongside a 10% reduction in associated headcount; 2) the reduction in capex on Myx integration and new platform investments; and 3) the reduction of media spending to target lower funnel, more-direct marketing opportunities to improve near-term cash flow.
We'll achieve this through a series of focus actions. Specifically: one by generating operating efficiencies as a result of the One Brand strategy including a 10% reduction in headcount taken in January; two by reducing capital expenditure as we lap the Myx integration costs and the new platform investments in 2021 as well as a clear focus on in-year highest return opportunities; and three by optimizing our media spend as we focus on performance marketing opportunities that are highly accretive in near cash flow.
The above objectives are set to reduce cash used in operating activities by $110mm in 2022 compared to 2021.
As a result of these actions, we expect to reduce our cash to use from operating activities by approximately $110 million in 2022 with immediate and significant improvements weighted towards the back half of the year.
However, net cash used in operating activities in 2021 by Beachbody was $215mm. Reducing said cash used by the planned $110mm improvement, the company is set to incur cash outflows of an additional $105mm in the current year, in which they do not have. Beachbody’s Q1’22 net cash used of -$44m also implies an annual run-rate of -$176mm in cash outflows on an annual basis. With only $63mm in cash and cash equivalents on its balance sheet as of Q1’22, Beachbody’s liquidity issues will likely become more prevalent in the coming two quarters.
A Forecast on Beachbody’s FY 2022 Cash Needs
In our income forecast for Beachbody, we are expecting the company to reduce its operating expenses related to S&M, R&D, and G&A spending by -275bps, -691bps, and -513bps, respectively. The operating expense projections assume that all of Beachbody’s cost-savings objectives for the year are met, and the company will generate a consistent momentum to cost-savings as they did in Q1’22 through the rest of the year. The figure below represents our forecast of the company’s operating expense.
And we’re forecasting a slowing delta in the company’s revenue decline – meaning despite a global economic slowdown and depressed consumer sentiment, we assume Beachbody’s sales to remain resilient with revenue declining at a slower pace than they have historically. The assumption portrays a best-case scenario that is consistent with largely mediocre performance observed across health and fitness consumer goods and services in recent months following the pandemic-era boom. While Beachbody revenue declined by -10.8% TTM, our forecast expects the company to slow its sales decline to -2.6% NTM. Forecasted revenue from our model for Q2 2022, Q3, 2022, and Q4 2022, is $197mm, $195mm, and $193mm, respectively. This is also consistent with seasonality in Beachbody’s business, where sales are higher in the first two quarters of the year.
"We have experienced and continue to expect fluctuations in quarterly results of operations due to the seasonal nature of our business. The moths of January to May result in the greatest retail sales due to renewed consumer focus on healthy living following New Year’s Day, as well as significant subscriber enrolment around that time.”
And we have also applied an improved gross margin to our forecast, assuming meaningful cost reductions pertaining to logistics and transportation as global supply chain bottlenecks gradually ease.
Lastly, we have assumed a depreciation and amortization rate of 7.8% and 12.41% to PP&E and content assets, respectively, which is consistent with Beachbody’s historical trends. An assumption in line with historical trends pertaining to share-based compensation as a percentage to revenue has also been applied in our forecast. With relations to working capital and capex, we are also estimating a significant decline over the forecast period due to management’s near-term focus on capital spending reduction initiatives.
As a result, we have arrived at a -$146mm negative cash in operating activities and investing activities for the full fiscal year 2022, inclusive of considerations related to management’s anticipated savings of -$110mm in cash used in operating activities for the current year. With just $64mm on its balance sheet, we do not think the company has sufficient liquidity for all its capital needs in fiscal 2022.
Many analysts have shared similar concerns as the company could be running out of liquidity to continue its operation. But Beachbody’s management has repeatedly dismissed the liquidity concerns and repeatedly stated that the company will not be raising capital through neither debt nor equity to fund its activities.
In Beachbody’s Q4 2021 earnings call, Jonathan Komp from Baird asked:
And just last one for me Sue on the balance sheet. I know you said we may hear more at a later date. But can you maybe comment on how long the current cash on the balance sheet with your current plans will be able to fund the business? I don't know if we can think about it in a number of months or quarters or any other context around that comment?
Beachbody’s CFO at the time, Sue Collyns, quickly dismissed his concerns and reinforced that the company will not be raising cash through capital markets:
Yes, sure. I mean, the fact that we've obviously got no debt at $107 million of cash at year-end, it's obviously a really strong starting position. And the other data point that we're looking at is budget projections for 2022 is really what gives us the confidence that we can service our working capital needs for at least the next 12 months without accessing the capital markets.
Joana Zhao from Bank of America shared similar concerns during the Q1 2022 earnings call:
And then my second question is on the cashflow needs in the second half of this year, do you foresee the need to raise capital? And if so, what are the plans for the capital raise, would it be through the debt or preferred equity? Thank you.
And again, Collyns quickly dismissed the liquidity concern of Beachbody:
Just talking -- answering your question related to cash flow and neat profile there. So, you can see no earnings release that we've got no debt. We ended Q1 with $53.4 million of cash and we can fund the business comfortably with cash flow from operations.
Collyns have since departed from the company as CFO and is now serving as an independent advisor to the company based on the disclosed separation and general release agreement disclosed and attached in Beachbody’s Q1 2022 financial statement.
It was also disclosed that 1) Collyns will be paid US$600,000 by Beachbody in installments over a period of twelve months from the separation date; 2) The company will pay severance benefits; and 3) the pro-rated target bonus “shall be paid on the date which annual bonusses are paid to the Company’s senior executives”.
Conclusion:
Beachbody is running dangerously low on cash. In our best-case scenario forecast, we think the company is likely only going to have enough cash to operate for an additional two quarters. While management should consider raising capital through equity or debt, in addition to ongoing cost-saving initiatives, to reduce risks of running out of cash to sustain Beachbody’s business, it will come at an un-favorable cost to shareholders.
With central banks engaged in policy tightening measures such as interest rate increases to slow inflation, borrowing costs have soared this year on new debt. This means fundraising through debt issuance would impact Beachbody’s margins, a negative impact on shareholders’ value. It has also become increasingly difficult to raise capital through equity issuances under the current market climate where valuations continue to face challenges from the weakening economic outlook. An equity issuance would also result in a dilution of share value, and further weigh on valuation losses sustained by Beachbody’s investors this year. On this basis, investors should not only pay attention to Beachbody’s liquidity outlook based on ongoing operations and cost-savings measures, but also consider the impact on shareholders’ value should the company proceed with fundraising initiatives.
Disclaimer:
I/we do not have a beneficial position in the shares of BODY 0.00%↑ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Substack). I have no business relationship with any company whose stock is mentioned in this article.
The content of this article is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial circumstances.