GoPro, Inc. (GPRO) Earnings Call Transcript & Summary

Good afternoon, everyone, and it's the 48th JPMorgan TMC Conference, the first that's virtual to my knowledge. And my name is Paul Coster. I cover IT hardware for JPMorgan. And it's my great pleasure to have Nick Woodman, Founder and CEO of GoPro on the call with us this afternoon, and also Brian McGee, the CFO. Welcome gentlemen. Can you hear me?

Hi, Paul.

Hi, Nick. Hi, Brian.

Brian, is still on mute.

Good morning.

Okay, good. We're live. Before we start, this is a Q&A session, a fireside chat format. And for the audience, if you're interested in submitting a question, you are able to do so by tapping on the Q&A button at the top or bottom of your screen and submitting a question. And although I have got cognitive overload, I will try and do my best to incorporate any questions into the discussion. Nick, thank you for joining us.

So big change that you've just effected with the go-to-market strategy with the move to direct-to-consumer, which I think most of us think is a really smart idea. Tell us how did this all come about. And what is it?

Well, going to more direct-to-consumer is an obvious opportunity, obvious now, I should say, given the strength of our brand and global reputation and market share leadership around the world. GoPro in many regions is a household name, and we've spent more than $1 billion in marketing over the last 9 years, building up our brand. It's been a long road that we've been journeying to get to this point where our brand is substantial enough that we can pivot to a more direct business. This is something that we've been thinking about pre-COVID, but we had more of a 3-year plan to gradually take our business more direct. There just wasn't the overwhelming need to do so, there is now. So COVID has served as a catalyst to accelerate plans that we already had. And the human impact, the economic impact of the pandemic aside, you have to be careful about identifying the silver linings to this because it's such a horrible experience for humanity, but if we were to isolate it and just look at our business, it's been surprisingly enabling because it's basically rewritten the rules as it were and given us the license to make these big changes that ironically, we believe, will have both near and long-term profitability benefits to the business. There's obvious gross margin benefits by selling a higher percentage of our products directly to consumer via gopro.com and other direct digital channels. And importantly, we can significantly improve lifetime value of each of our customers because when you sell directly to them and you establish a relationship with them, you can have a much better communication with them over time, keep them aware as to your latest and greatest. And then importantly, through our various digital services, including our subscription service, we can maintain and build a much closer relationship with them because our serving of the customer doesn't end with the product sale, it continues on with storing all of their GoPro content in the cloud for them and providing them ongoing value through our ever-expanding GoPro App experience. And as well, should they ever have a problem with their GoPro, we can replace it for them, no questions asked. And as well, there's additional value that we can layer on, on top of that, and we will be doing so. So from a strategic standpoint, I would say I'm relieved to not have to wait 3 years to phase in these changes. It's much more exciting to consider the impact we can have on the business when we make the bulk of these changes this year.

Of course, you're not completely withdrawing from retail, right? I mean this is all very precision in nature.

That's right. We're -- there are certain regions where there's no change to our go-to-market strategy. The Asia Pacific region, for example, we'll still work through our existing distribution network and leverage our experience with our existing go-to-market strategy in the retail stores and additionally, invest more in our direct capabilities in those regions as well. But business will remain as usual in APAC and in Latin America. But in North America and EMEA, we will have a much different strategy, whereby our flagship GoPro will be sold primarily through gopro.com directly to consumers, and our mid- and entry-level products will continue to be sold through a select number of high-performing retailers and specialty stores to leverage retail's ability to really move entry-level and mid-level products. They do a great job of that for us. But the flagship will be an effective tool for us to drive more of our business through gopro.com directly. And as well, we'll use the flagship to excite consumers at some key specialty locations. And occasionally, you might see it at some larger retailers and whatnot. But for the most part, the flagship will be what powers direct strategy because it is such a big part of our brand and it is what consumers are most interested in.

Got it. But what is the current mix of direct and retail? And how do you think this will evolve over time?

Brian, do you want to take that?

Yes. Paul, hopefully, you can hear me. I thought I'd also start with forward-looking statements and safe harbor. So we may make some forward-looking statements today. Those assume COVID-19 pandemic doesn't worsen. And I urge you, investors, to look at our Form 10-Q and 10-K that are on file with the Securities and Exchange Commission and reviews all those. So with that said, Paul...

Thank you, Brian.

No worries. In 2019, we were about 10% direct-to-consumer. But we have to parse that a little bit. That's our aggregate direct-to-consumer business against total revenue. And actually in America and Europe, we were -- in Europe, almost 25% of our business was direct-to-consumer, so we already had a sizable presence. And in North America, we were 15% to 20% -- between 20% range of direct-to-consumer. So we already had a significant stickiness with consumers already. In this quarter, we were at about 17% of total. And our European portion of direct-to-consumer increased quite significantly actually. As we said on our conference call in the month of -- just the month of April, we were over 50%, 5-0 percent, of our business was direct-to-consumer. We think it's going to end at about 40% given we'll expect to have reorders from retail in the quarter, so it will balance itself out. And for the year, we think we can be upwards of 45% of our business as direct-to-consumer, so a significant increase from 2019. As Nick had mentioned, margins are better on gopro.com. And so by a factor of 5% or 10%, in some cases, a little bit more, so the model of more direct-to-consumer should yield better gross margin. And of course, we took our operating expenses down significantly to between $285 million -- yes, $285 million to $290 million in a year, so 2020, and that's down nearly $100 million from 2015. So we lowered the breakeven point to the point where we can sell roughly half the number of GoPros in a year. So we took a breakeven point from 4 million units a year to 2 million units a year. And so that bodes well, I think, for the company and gives us a lot of leverage as we -- because if we can hold to demand levels, we can drive a more profitable business going forward.

Got it. Do you also get to -- is it easier to manage the inventory cycle as well when you're doing direct-to-consumer?

The inventory is a little bit easier. We then -- we have to make sure we get it right from a geo perspective because cables and things are different in a box. But it is a little bit easier. It's much better from a working capital perspective from AR, right, where we typically run 35 to 40 days. And our cash cycle then becomes, as we're getting 45% to 50% of our business as direct-to-consumer, our DSOs probably come down to 15 days. So it's quite an improvement in cash generation.

So Nick, I think maybe the question is how do you find new customers. And because there's a risk, I guess, if you go direct-to-consumer, you're kind of talking in an echo chamber, lots of people you don't know. Can you talk to us about how you spend, find new customers in this new go-to-market model?

Well, one of the primary advantages of going more direct is, again, the value that you can provide people. And so when you think about -- and what I mean by that is giving people more for their money, and types of value that's ongoing, not just a once-and-done sale. And when you consider the brand that we've built, the market share that we've established and the loyalty that we've developed as it relates to upgrades and so forth, with the value propositions that we've been making over the years, it's been impressive and allowed us to attract a lot of consumers. Then when you consider a significantly expanded value proposition, it's exciting to think about how we'll be able to leverage that expanded value to attract both existing GoPro users to upgrade and become even more active as users and as well, our ability to convert people that have been on the fence or have left the experience and have been interested in coming back in and so forth. So on that front, there's a significant opportunity to drive conversion of the existing group of consumers who are paying attention to or already involved in GoPro. Then in terms of attracting entirely new audiences, there's multiple ways that we do that. One is we expand the functionality of our products by enabling them to work better as live streaming devices, for example, enabling them to work for the first time as a web camera, for example, which -- they already work as a live streaming camera, but we're going to be enhancing that experience because the platforms that people use for live streaming today aren't necessarily the most convenient. So we'll be delivering a more turnkey convenient experience for people, which we think is going to capitalize on the growing number of live streamers that we're seeing today using our cameras, for obvious reasons, during this stay-at-home period. And then later this year, we're also going to be enabling webcam functionality for the first time in a GoPro via a simple firmware update that will be free to our users. And then other performance usability enhancements in future models, we think we can attract new customer segments as well. So that's on the product front. And then as it relates -- well, one more product I should mention is our app. We're still on track to deliver a new expanded app experience later this year that will cater to both GoPro owners and importantly, nonowners alike, smartphone-only users. There are more content-related problems to be solved out there for people, and we're on to what we believe is a big one, a widespread one. And we think it's going to expand GoPro's relevancy to nonhardware owners, smartphone-only users, and provide us additional digital subscription revenue stream as well. So stay tuned on that, but -- that's going to be exciting. And then in terms of attracting more customers, you also have the effectiveness of our e-commerce platform itself and our ability to improve conversion, improve traffic to the site more effectively at lower cost. And frankly, being more direct with our flagship product can help this strategy as well because when you're one of the fewer places in the world to get the coveted flagship GoPro, it can result in potentially lower cost of advertising to drive that traffic because you're not competing with every retailer under the sun to make that same sale. And as well, you can significantly drive conversion because of the value that you're offering directly. So long answer, but you get the point that there are a number of ways that we can grow our business both with existing and entirely new customers.

To take your point that there's some good from COVID, we're all learning new things and some -- it's catalyzing some changed behavior that I think is positive. But obviously, it's generally just awful. So how has it impacted you so far? And what are the immediate implications of COVID for you in terms of supply chain, production and fulfillment, et cetera?

Well, I'll say a brief patch about employees. And then from an operations perspective, I'll hand it over to you, Brian. I'm incredibly proud of -- I get a little choked up when I think about it. I'm really proud of GoPro and all of its employees around the world. This team has been through a lot over the past few years. So in a way, you could say that everybody is battle hardened. And that's really benefited the company in that we're not new to crisis. It's unfortunate because in 2019, we had a banner year, and we're looking at capitalizing on that momentum in 2020. But these things happen. And I just want to give a huge thank you to all of GoPro's employees and our extended network of suppliers and manufacturing partners and so forth. We're a tight-knit group, and everybody is executing exceptionally well, and that gives me a lot of confidence for the future. But maybe more specifically to your question, I'll hand it over to you, Brian, for operational update.

Yes, let me take that. Thanks, Nick. And I agree, the company has done a phenomenal job at just making everything work along with all of our partners. That's been incredible to just see how it's come through. On supply chain, we're actually in pretty good shape. Ironically, we ended up having a little bit more inventory in the channel exiting 2019. So there was enough product to -- for consumers to buy, which they bought about 7,000 of them in Q1. We're still able to get product from our supply chain partners, and so we haven't really seen any issues there. We also have our own buffer inventory, so we're able to actually work through that. On a kind of positive front, and we talked about this on the call, we saw sell-through decline quite rapidly by the end of the last 2 weeks of March and kind of first week or so of April. And it's kind of spun back, and we talked about being at about 600,000 units of sell-through, even through amidst -- in the middle of this unfortunate crisis. And as we've even recalibrated over the weekend, we actually see being over 600,000 now, maybe as high as 650,000 units. So we're seeing good growth resurgence in China. America has come back in a big way, Australia and even Europe has come back. So we're very encouraged by the sell-through trends right now [ coming in ] for the products. And it's interesting because it's correlating a bit to -- as we look at our camera connects, trends on a weekly basis and we get app users, we're actually -- if I look at North America, we're ahead now in April where we were back in the beginning of January before the crisis hit, that's the same with camera connect. So that's at a very nicely [ flow ] at the end of the first quarter. And we're seeing Europe come back, particularly the U.K., the Germany and France returning, and China actually returning in a sizable fashion. So we are seeing positive trends in the usage of our products as well as the sales of our products through retailers and on gopro.com.

You're breaking up a little bit, but I think we got the gist of most of that. It sounds like the incremental data points are quite positive across the...

Unfortunately, he broke up when he said that what was looking like 600,000 is trending up as high as 650,000 for Q2 in terms of sell-through. So that's an important point that hopefully didn't get lost. 650,000 units is what we're trending to for Q2, between 600,000 and 650,000 now. So hopefully, that came through.

Which actually puts you in a pretty good shape for your target this year. As for the entire year, of course, you'll be reducing your channel inventory. Because you're reducing your channels, your unit volume expectations are lower. Anything to talk about there in terms of the fluctuations in channel inventory over the course of time?

Yes, Paul. Hopefully, this is coming through better now. We expect to sell-through between 2.8 million to 3.2 million units this -- in the year. And inventory exited at 1.4 million units in 2019, and we expect them to be around 600,000 units or so exiting 2020. So at the midpoint, if we're going to sell through 3 million, I would argue we're going to sell in about 700,000, less than that. So that puts us in a good position as we look ahead to 2021 because we'll have channel inventory in the right position. If demand just stays at 3 million, and we have improved margins and lower OpEx in '21, as we've kind of talked -- laid out, that can generate a lot of earnings and cash flow.

Right. Well, it's 30% growth there without doing any change in demand, so that would be pretty interesting. That's very interesting, actually. I've got a question from the audience here. By the way, I know folks are looking for the video. I think this is just audio-only, so apologies for that. As for this question, I'll relate to Nick, if I may. At last year's conference, Nick mentioned recent innovations like HyperSmooth and that would bring more technology licensing opportunities. Into what segments could you envisage expanding licensing: home security, autonomous vehicles, body-worn cameras, et cetera. And you alluded to some new growth opportunities with services, but what about licensing?

Yes. The opportunity to license remains. We've looked at a number of opportunities. And to date, we haven't found an opportunity that's as financially rewarding as reserving our technology for the sale of our own products. So I wouldn't rule it out. But to date, we see more opportunity in doing just that, leveraging our outstanding innovation to drive interest and demand for our own products and that we're most excited about the opportunity as it relates to expansion and growing our TAM via digital services via our app. We just see a significant opportunity to leverage our brand strength and our awareness-driving capabilities to serve people in new ways. We've been such a hardware-focused business for our entire history. And over the last few years, we've really gotten quite competent at software and cloud development. And we now see ourselves being legitimately in a position to serve people in a new way that -- some of these problems that we're addressing are -- I mean the moment that I tell you what we're going to do for you, you're going to slap your forehead and say you've always wanted that. You just never connected the dots to realize it was possible or that you even needed it until somebody showed it to you, a little bit like the GoPro camera itself. It's so obvious when you see it. And so we're excited to bring some of this to market later this year. And we think it's just a natural extension of our brand that, primarily, will be -- even if it doesn't lead to expanded hardware sales, which we think it can, because as we grow our relationship with people via our app who don't own our camera, obviously, if we can help them get more out of their content, over time, we may win them over as hardware customers. But that's a secondary benefit. The primary benefit of serving them digitally, we see significant revenue opportunity there, and we're excited to bring this to market later this year.

That's so exciting. Your partner, I believe, is Jabil on the contract manufacturing side, and so I assume that there's some variability to your cost structure around the hardware side of the business. But you are, nonetheless, going to be generating lower volumes than previously for a while. What does that do to gross margins, if anything?

Paul, yes, we -- Jabil is our largest contract manufacturer. And we've been working with them closely in this environment. And from a product cost perspective, I'm not seeing any changes right now while holding the line in terms of product costs. We're actually able to look at certain areas of costs and actually reduce some costs in accessories. But cameras, we expect to be able to hold our product costs and therefore, be able to increase margins as we shift more business to D2C versus through retail partners.

Right. I guess you've already given us that clearly upfront. In terms of weathering the coming storm, what have you done in terms of the balance sheet and the working capital and liquidity situation? How long can you survive this downturn if it gets worse, which [ it does seem like ]?

Yes. We have done cash stress testing. We ended at $125 million of cash in Q1, projected a $100 million in Q2, so we use a little cash. But it increased to $150 million in Q3 and $200 million in Q4 just based on -- just continuing our current demand would yield debt because we would be more direct to consumer. We still have plenty of borrowing capacity, should I need it, on our asset-backed line of credit, $60 million to $70 million in a month. We use $30 million of it today. By the way, the $150 million projection for Q3 assumes we paid that back. So we can stay at this volume level and survive as a company. So that was job 1 and why we got the operating expenses down to $100 million because that protected the company and reduced the breakeven point to 2 million units a year. And right now, we're running at a higher clip than that. So we did do a stress test and -- which is why we reduced OpEx. And so far, we're running more to our base level plan, well above it, the downside case. So far, demand is holding, so far, so good.

I think this is probably a pretty unfair question given the macro circumstances and the fact that you're making such big changes or some. But has any -- do you have any sort of long-term targets in terms of growth and margins that you can share with us? Or as I said, is it an unfair question?

Brian, we agreed you'd take margin questions.

In which case, Nick can take the growth question.

Yes. Yes. I'll -- what I'll say is that we're very encouraged in the sell-through that we've seen even through the depths of the pandemic so far, right? So even as dark as things got, when the least was known about the virus and its impacts on society during the market -- massive market dip, even then, we saw significant demand for GoPro, significant sell-through. And as Brian noted, that's been snapping back. And so we feel like we've got a very resilient place in the world. We play an important role in people's lives. Creative people don't stop being creative when they're stuck at home. They just find new ways to be creative. And I guess you could say we survived that stress test, and we're coming out stronger for it. And as Brian noted, everything we say is caveated by the fact that it assumes that the world doesn't -- that the pandemic doesn't materially worsen. But if this is what we are dealing with, and the fact that humans are so resilient, humans are so creative, humans also require stimulation in entertainment, I mean we call ourselves consumers for a reason, that they're going to continue to find ways to be creative and entertain themselves. And with our hardware and apps, we're going to continue to be an important way that people produce visually and express themselves and share themselves. And I think that's proving out by the fact that we're seeing usage rates climb. I mean they're not that far off year-over-year from when the world was totally normal a year ago, and that gives us confidence going forward when you consider what our road map is, which, of course, you guys don't know that yet. And when you also consider that we're going to be super serving our customers with even more value going forward. So I said it in my prepared remarks on the earnings call, I really believe that our best days are ahead, that we have the potential to be more profitable than ever with our much more efficient consumer-focused strategy. We're not changing what we sell. We're just changing how we sell it. And the math is clear that if demand remains the way that we're seeing it, we're going to be in great shape.

Rather than stuff the last minute with another question, I think we'll end on that high note. Thank you so much, Nick and Brian, for participating in the call today. We really appreciate it.

Thank you, Paul. Always enjoy it.

All right. Thanks.

Thank you Paul.

Take care now. Bye-bye.

Bye-bye.