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

Hello, and welcome, everyone. Thank you for joining us here on Day 2 of Citi Technology's -- our Citi Investment Research Global Technology Conference. I'm Jim Suva. I'm in charge of the IT hardware and technology supply chain analyst. I'm very pleased to bring to you in this fireside presentation and interactive discussion, GoPro. We are very pleased to have both in front of us the Chief Executive Officer, Nick Woodman as well as the Chief Financial Officer, Brian McGee. A couple of housekeeping items. There are Citigroup investments research disclosures to please read, and if you're a MiFID II client, please make sure you have those agreements in place. No media or press are allowed on this call. So media and press, please disconnect as this is held for institutional investors only. And if you are media or press, we will go through the list and disconnect you as this call is starting now. It is, again, for institutional investors only. We want to kick things off by having Brian McGee, the Chief Financial Officer, reference the safe harbor statement. Brian?

Thanks, Jim. Yes, I'd like to remind everyone that our commentary may include forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, which may cause actual results to differ materially. Additionally, any forward-looking statements made today are based on assumptions as of today, including, but not limited to, assumptions that consumer confidence does not further erode due to the global pandemic. We do not undertake any obligation to update these statements, and we refer you to our filings with the Securities and Exchange Commission, included in our most recent 10-K as well as any other reports that we may file from time to time. So with that, Jim, why don't we kick it off? Thank you.

Great. Why don't we start talking big picture about demand trends, have they changed since we entered 2020? I feel like the beginning of the year was so long ago, we had everything from tariffs and trade wars to now the coronavirus. Can you talk about the demand trends that you've seen now versus, say, the start of the year?

Yes. Let me start with that, and maybe, Nick, you can come on top of it. Our demand has been strong globally in every region in Q2 and in Q3. We talked on our earnings call, where we expected sell-through, which is the best measure of demand, to be about 900,000 units. We're seeing at 900,000 to 950,000 in the third quarter, and that puts us up 10% year-over-year and about 25% sequentially improvement in actual demand. So we're very excited about that. And so because so much of that is going through gopro.com, which is a testament to our direct-to-consumer strategy that's working. We're seeing even more growth on the subscriber end. We've put out a press release just a week-or-so ago, that said we were over 450 -- or 400,000 subscribers. We think we'll end the quarter between 425,000 and 450,000 subscribers, which is great. And that puts us right on our trajectory for our expectation to be at 600,000 to 700,000 subscribers by the end of the year. So we're seeing demand on product. We're seeing demand on gopro.com, which is great. And that's translating into a nice subscription business as well. So from that perspective, everything is trajecting in the right direction.

Great. Thanks so much. Nick, do you have anything to add?

And Nick, if you have anything to add?

No. Brian, you broke up a little bit. So I'll just recount in case it wasn't clear to people that we have recently passed 400,000 subscribers. That was in a press release a week or so ago where we announced a new live streaming service for GoPro subscribers at gopro.com, where you can now easily live stream from your GoPro to gopro.com in a tailored experience that's really convenience and high quality. And in that release, we announced that our paying subscribers had surpassed 400,000. And we're now targeting 425,000 to 450,000 by the end of Q3, and we're right on track for our 600,000 to 700,000 by year-end. I would just add that while demand has rebounded significantly, I'd say, from the depths of the COVID -- the onset of COVID and the depths of sort of the consumer insecurity, if you will, in the March, April, May time frame. We've seen demand rebound across all geos and all channels. And while dot com has done really well, as we expected, we've also seen a stronger-than-anticipated rebound at retail again in all geos, which is great to see, both for GoPro sales, but just in general, to see consumer confidence come back like that. Now it's not happening in all product categories, but it is happening for GoPro's business. So we're grateful to see that. And that adds to our confidence for the rest of the year that we could have gone through what we all went through earlier this year and have come back as strong as we have, is testament to the strength of our products' relevance in people's lives today. It is a new world we're living in, and while certain things have changed dramatically, certain things remain the same. So for example, people aren't traveling on airplanes like they used to, but they're still traveling. They're still pursuing passions and adventures. It's just more local, more road trips, seeing more of your home state, seeing more of our country in the United States, for example, and people are still using their GoPro's to capture and share those experiences. We've expanded the GoPro's functionality to include working as a web camera now for people. And as I mentioned, improved the experience for live streaming. So net-net, people are still looking to their GoPro as a functional communications tool and our business continues to grow as a result. And when you combine that demand with our lower operating cost profile and improving margin, you've got a great opportunity to grow the profitability of GoPro, not just over the second half of 2020, but for the full year of 2021. So we're looking forward to it.

In general, how do we think about the pandemic? Has it shaped or changed demand a little bit? For example, more of a willingness to go to gopro.com to make their orders as opposed to going to a big box retailer? Or also, let's be honest, fortunately, all of us have jobs right now where we're working really hard, but there's parts of society also that lost their jobs. How should we think about the pandemic and maybe anything that impacted demand, both on the positives and negatives, including you mentioned vacations? I'm not on an airplane either, but I'm surely taking day trips in my car.

Right, well, consumer shopping has definitely accelerated to online during the pandemic, and you don't need me to convince you of that. It's quite clear and has been well documented in the media and by other companies that consumers are shopping more online and research shows that they're intending to continue to shop online. It's -- genie's out of the bottle. I think this is -- the pandemic has accelerated a trend that was already very real. And that bodes well for our strategy to take more of our business direct and offer our GoPro customers more value than would have been possible now that they're shopping at gopro.com, we can create a much more valuable and convenient experience for them. And that will take even more shape over the course of the year. And our subscription service will become more central to the GoPro brand experience and any value that our customers have enjoyed from GoPro is going to expand significantly a little bit later this year. So we'll see that. And so we think that will just increase the likelihood that our customers shop at gopro.com. But let's be real, some consumers still want to shop at retail, and we have terrific retail partners that are driving a significant business for both of us, the retailer and GoPro alike. And their business is doing quite well. And so we're happy to consolidate our retail business to the best retail partners we have that are driving the best business and generating the most profitable return to GoPro. So this balance between being more of a direct company and maintaining the strongest channels that we have at retail is serving us well. And that -- again, you mentioned you're still being active. You're still getting out and doing things as are many of our customers. And that's important is that creates the opportunity for human experiences that people want to capture and share. And given that we can't share those experiences in person with as many people as we could in the past, that perhaps grows GoPro's relevance in today's world in that GoPro is an ideal tool to share photo and video of your experiences with loved ones and -- that couldn't be there with you anymore, for the time being, I should say.

And maybe as we dovetail into what you just mentioned about going direct, it seems like the coronavirus just double underscored and bold, italicized. How important it was to go direct because during the coronavirus, I'm sure you're like, "Woo! Thankfully, we did this." As you look at that, can you talk a little bit about maybe it's you or Brian, a little bit about the financial impacts about going direct, how should we think about it? I'm sure you have more control over your inventory, but also about pricing and not having a middle person take a cut, how should we think about all of those things?

Yes. Jim, let me start there. As we've talked on previous earnings call, going direct is, a, we get contact with the customer that we can market to in the future. So that's important from a lifetime value of a customer perspective. But also selling on gopro.com, we make anywhere from 5 percentage points to 10 percentage points more margin than if we're selling in the retail channel. So as we've increased our percentage of our mix, of our business from about 10% on gopro.com to where we'll be close to 40% in 2020 and probably about 50% in 2021. That adds between 2 and 3 percentage points of margin improvement kind of an year-over-year basis. And so we've kind of given an operating model of a margin profile of 38 points to 40 points of margin, kind of starting in the second half of 2020 and then fully realizing that in 2021. So as we see revenue growth into 2021 with that margin profile, and lower OpEx, we gave guidance for OpEx in '21 to be $260 million to $280 million. That -- if you kind of walk through that framework of math, that drives significant earnings expansion and cash flow for the company. So that's what gets me really excited about the business. And then you mentioned in inventory and working capital management, of being more direct. So we'll have less channel inventory. We control our inventory. We've always done a pretty good job of inventory management, but it gets better with direct-to-consumer. And quite frankly, from an AR perspective, our days outstanding will move from 30 to 40 days down to around 10, maybe 20 days. So the cash cycle from being more direct-to-consumer is much better as well.

When we look at the Q2 results, I believe if my numbers are correct, around 95% of your cameras were above the $300 price point. I might be wrong on that, but I think it's around that or above and, say, versus 40% or 45% a couple of years ago. How are you able to charge such a premium? Is it really the software? Is it the easability of it? And do you think that we can go higher? Or is the goal kind of to keep it where it is? Because at some point, you don't want to price too many people out of the market and getting them to continue to be a subscriber is very important.

Well, what you've seen is we've…

Go ahead, Nick.

Well, I was going to say, what you've seen is the value of what we've been offering our customers at the $300 and above price point is so compelling that consumers have moved up. It's more of that than anything. And we've also gotten a lot better at managing our inventories, so that there's not as much legacy product to sell off at lower price points, which doesn't help margin and doesn't help ASP. So a combination, I think, of those 2 factors. Better inventory management, less discounted sales of legacy product, and dramatically improving the value proposition at the $300 and above price points has resulted in this very significant shift towards the higher end. And if you look at what our product pricing is, it's -- aside from the MAX camera at $499, it's what we've been charging for our cameras for years. So we're definitely not getting these higher ASPs by raising price. We're getting there by offering more value and managing our inventories better.

Yes, I got that. Very clear. And that makes a lot of sense. And Brian, do you have anything to add on top of what Nick was just talking about?

Yes. I think I'll add 2 things. One is this is an intentional strategy for us to be able to offer better value at the higher price points to move the consumer in that direction, and that's been working I mean we were back in '15, '16, '17 in the 40% to 50% range of MSRP over $300 and we moved back to 75% in 2019, which is how we got back to being profitable. And we're seeing that continue that pattern into 2020, which is also helping us lift ASPs. We're selling higher-value products, better margin products. And that will generate the 38 to 40 points of margin that we talked about in -- as an operating model. So that's all moving in the right direction from an ASP and gross profit perspective and then being able to drive back to earnings.

Speaking of actions by behaviors, I believe Nick mentioned that you haven't increased prices, you're just adding more value and people are selecting themselves. I actually do believe that. When we think about heading into Q4 with the holiday season and who knows if coronavirus goes away or doesn't get away, do you need much change any of your promotions or go-to-market strategies? Or how do you look at this holiday season, say, versus prior years? Because some of the dynamics are a little bit different this year.

Yes, no doubt. Well, yes. We have a terrific amount of data from all of our years in business and all of the holidays and the various marketing events that we've used to drive sales, and some of those will still remain true. That data is still valid. But a lot of things are changing, right? So the shift to online is one of them. The timing of consumers' purchasing behavior over the fourth quarter is a bit of a tossup. I mean general consensus is that consumers will shop earlier because people are worried about getting their packages delivered on time because of the constraints with UPS and FedEx and U.S. Mail. And so we definitely think that, that's our thinking is that the consumer is going to be buying earlier to mitigate the risk of not getting their packages in time for the holidays. We think that it's going to be a competitive holiday as it relates to winning consumer share of wallet. A lot of brands across all consumer categories have been struggling. Not everybody is seeing the demand for their product categories like GoPro is. And so that will be something to watch as to see how competitive brands need to be, how competitive retailers need to be. But we feel good about how we're positioned and our own marketing plan for the fourth quarter is already built into the second half and Q4 outlook that Brian provided on our last earnings call. It's built into our margin guidance. It's built into our revenue guidance. So we're not expecting any surprises. We feel really good about the value proposition that we've created or that we are creating and going to launch over the holidays at gopro.com for our customers. If we look at historicals on the value props that we've -- propositions we've had for consumers over the holidays, we're very well positioned this year with the launch of our new products and focusing on that launch availability at gopro.com. And then what we've worked on with our retail partners is also robust. So we feel really well positioned. Again, no surprises. It's all built into the guidance that we've given. But I think at a macro level, this will be a very interesting holiday because everybody's data sets will -- they'll be helpful, but they won't directly apply to this year for a lot of people's business.

Nick, what do you mean by this year's data sets? I guess that's a bit of a newer term for me. I'm not that…

Well, no, no, no. Your historical data that you use to project out the rest of your year. Like you said, this is a very different year going into a very different holiday quarter for a lot of brands. I think because GoPro -- look, demand for your products is a bit like air speed over a wing for an airplane, right? The more air speed you have, the more lift the plane has and the more control it has. The more control you have, the better you can land that plane on the runway as it relates to your forecast. GoPro currently has quite a bit of lift. We have a lot of demand. That means that our ability to navigate our plane onto the runway of the fourth quarter, we feel, is quite good. For other brands that don't have as much momentum in their business, that's going to be a harder fourth quarter for them, because they're already coming in close to stall speed, how do they generate momentum going into the fourth quarter is going to be a real question for a lot of businesses. Fortunately, for GoPro, I can't stress it enough. We have a lot of momentum. We were looking at 900,000 units of sell-through for Q3. We're now looking at something more between 900,000 and 950,000 units of sell-through for Q3. So our momentum is building, and that gives us confidence to navigate Q4.

Okay. That makes sense. Nick and Brian, can we talk a little bit about some of your newer products whether it be the 360-degree camera, whether it be your lighting category that you launched. Can you talk about some of your newer products?