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

Good afternoon, everyone. My name is Erik Woodring, I am part of the IT hardware research team here at Morgan Stanley. Let me just read a quick disclosure for you here. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that, please join me in welcoming Nick Woodman, CEO; and Brian McGee, CFO of GoPro to our conference. Nick founded GoPro way back in 20 -- excuse me, 2002. He's been the CEO ever since, while Brian joined in September of 2015 before being named CFO in 2016. So Nick, Brian, thank you very much for joining us.

Erik, thank you very much for having us. And before we get started, I'd like to remind everyone that our remarks today may include forward-looking statements. Forward-looking statements and all other statements that are not historical facts 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. This means that results could change at any time, and our commentary about business results and outlook is based on the information available as of today's date. We do not undertake any obligation to update these statements as a result of new information or future events. Information concerning our risk factors is available in our most recent annual report on Form 10-K for the year ended December 31, 2020, which is on file with the SEC and as updated in future filings with the SEC. With that, let's rock and roll.

Cool. Awesome. So let's start with a review of 2020 because in many ways, it was obviously a tough year for all of us. But it was also, in a certain sense, positive because it kind of helped shape what your business has become today, leaner, nimbler, kind of more focused on super serving your core customer. So maybe just walk us through what you learned in 2020 and how you -- and how you're using that to shape the future of GoPro?

I'm mute. Okay, I'm on mute. As we discussed, muting me can come in handy. Yes. 2020 -- look, COVID, obviously, is everybody's nightmare. But ironically, for business -- for our business, it served as a catalyst to speed up some strategies that we were going to take more of like a 3- to 5-year approach to, and we had to take a 3- to 5-month approach because of COVID. And that's taking our business more direct and making subscription more central to our customers' experience and more central to our business model. And one of the reasons that we fared really well last year was that much of this was already in motion, it was just on another time line. And so we've already done a lot of the research that made us comfortable that we could drive a much larger percentage of our business, direct from GoPro.com. We learned through customer research that a GoPro purchase is a highly considered, highly researched purchase decision for most consumers. It's not a spontaneous, bump into it at the store purchase decision. And we also learned that the vast majority of consumers that were -- that research and consider buying a GoPro visit GoPro.com as a part of their research process. And so it was clear to us that if we presented the consumer with a -- just hammer over the head, high value proposition that we could win a large percentage of purchases that would have otherwise not happened or would have gone to another retailer of GoPro. And so that made us pretty comfortable. That data, that research made us pretty comfortable that it was safe to pivot quickly to making GoPro.com the highest value place that you could possibly buy a GoPro by making it available, making the flagship GoPro available to consumers at a discount if they also subscribe to the GoPro subscription for a year. And so that's been a win-win for us. It's been a win-win for the consumer because they get enormous outsized value compared with what they were getting before. And frankly, it's also been a win for our retailers who've had a tough go of it through COVID as well. The natural question is, how does this work for the retailer? But our retailers are incredibly good at selling our entry-level and mid-level products as well as our flagship, but they do a lot of business in our entry and mid-level priced products. Whereas at GoPro.com, we primarily sell the flagship to traffic that comes through there. And so by distributing our products accordingly to where they sell really well and reducing our retailer count to only the best retailers, we consolidated that off-line business for the best retailers. And so for many of them, their GoPro business has grown year-over-year, which is incredible to say, even while we are really showcasing and providing the most value around our flagship camera at GoPro.com. So if it wasn't for COVID, it -- we would not have been able to move this quickly and have the support of our retailers and so forth. But because of how disruptive last year was, this strategy made sense for everybody, and happy to say that across the board, everybody from our retailers to GoPro directly to our consumers are winning.

Awesome. That was a great summary. Maybe I'll touch on the last point you're making about the DTC shift. So historically, the channel has been a big driver of your revenue. Clearly, that changed this year, 32% of sales came from GoPro.com. That's going to 40% next -- in 2021. How do we think about that trajectory going forward as you add more value to the opportunity on GoPro.com, but at the same time, your retailers start opening their doors for "normalized business" as we emerge from this pandemic? So it is -- is 40% the peak that we should think about? Is 50 or 60 or 70? Just kind of help us think about that mix shift.

Yes. Maybe I'll take that, Erik. I think you're right. We did say we should be about 40% direct-to-consumer in 2021. We expect it to continue to improve as we -- there will be more awareness, of course, on what the offering is on GoPro.com. And we'll be making investments. I think we talked about on our conference call on our website to drive more traffic, more conversion, make our advertising and CRM more effective to the consumers that we have. So all those will kind of work in tandem to continue to drive more business on a D2C, which will also drive more subscription. That's the other thing that Nick talked about, and we bundle the subscription with high-end camera and we're getting about a 90% attach. We've continued to get a 90% attach in 2020, and that's continued into 2021. So we're very happy about that. And the result is our subscription business is very profitable. It's about more than 70 points of gross profit. It's better than 50% operating profit to the business. So when we look at our margin expansion from 36% in 2020 to 38% or so, 38% to 39% in '21, that's coming from our DTC growth, which is more profitable as a channel versus retail, more subscription, which is very profitable and continuing to sell higher ASP, higher-margin cameras, right, and accessories. So that's kind of the trifecta that's helping to move margin, continue to move margin in the positive territory. And if you look at kind of how we guided '21 for this and double-digit EBIT when we historically been [indiscernible]. So it's -- the shift has improved margin, improved subscription. It's better for the consumer. We have a direct, more direct relationship with the consumer. And we've been able to reduce operating expenses significantly in the model as well, which is a major factor to driving profitability for the company.

Awesome. So maybe let's dive right into the subscription service. You had 761,000 subscribers at the end of the year. You expect to reach 1 million kind of halfway through this year, 2 million by the end of the year. Are those still targets that you believe you're still on track to achieve?

You're right. We were at 761,000. That was 145% growth over 2019 and a 52% jump sequentially. So nice improvement. Yes, we said, actually, yesterday, we're on track to be at 1 million subscribers in early Q2. So we are targeting for that. And our goal is to approach 2 million subscribers by the end of this year. And just to put that in perspective, as we get near 2 million subscribers, 2 million, that's $100 million of annual recurring revenue looking ahead to '22 at 50 points of profit. So that's $50 million looking into right there of profitability into '22 before you had any more subscribers. And so the other nice part about this is the software and subscription piece of our business is helping to diversify the overall businesses. It's not just hardware, it's now hardware and software and the software component being very profitable, the overall results for GoPro.

Super. So maybe just to build upon that point before we head to a different topic is, clearly, you changed your sales motion in September to drive the bundled camera subscription offering with the HERO9 Black. It's obviously been a tremendous success for you, high attach rates. But those annual subscribers kind of come due next September. So what is GoPro doing to make sure that those subscribers stay on the platform, stay committed to the subscription service and kind of continue for more than just this initial 1-year period?

Nick, do you want me to take that or you want to...

No. I've got this mute/unmute thing. So I got to wait for the unmute button to pop up. So that's why there's this awkward pause. Yes, sorry about that. So as it relates to subscription, it's important for people to know that before we bundled the camera with the subscription at GoPro.com, we grew to roughly 500,000 subscribers and with very low churn rates. And that's really important because that proves -- that's great data that proves our ability to attract subscribers without the camera discount and retain subscribers without the camera discount. We have great data that shows that subscribers are taking advantage of the subscriber benefits. Average order values with subscribers are higher than nonsubscribers because they're taking advantage of the additional discounts at GoPro.com. As a subscriber, you get 30% to 50% off accessories at GoPro.com. We're seeing a higher return to GoPro and purchase rates with subscribers than nonsubscribers. And it's just really good to see that the subscribers are taking advantage of the benefits because it shows, one, they understand the benefits and two, they're finding a vale. So that's really important. And again, that 500,000 subscriber count that we got to before bundling the camera and the low retention rates that we saw there, we're seeing that continue. With the new cohort, you're right, it is on the anniversary where the subscriber is on opt out events that would make a subscriber a nonsubscriber at that point. And our job is to create as much value for that subscriber between now and then as possible to ensure that they're motivated to stay on as subscribers. Some of the things that we're going to be doing to enhance the already significant value of GoPro subscription, is we're going to be including, at no additional charge, the $10 a year subscription value of the GoPro App experience that's coming out soon, that is going to dramatically simplify managing all of your personal photos and videos and helping you get more out of them. That is an app experience, it's also going to be open to smartphone-only users and users of other cameras, but it will have significant benefit to GoPro camera owners as well. And we're going to be rolling out additional benefits to create more value for GoPro subscribers between now and the anniversary date. But based on the data that we're seeing so far and the engagement level amongst our subscribers, we feel really confident that the vast majority of those subscribers will stay on as subscribers after the anniversary date.

Awesome. So you beat me to my next question, which was to talk about kind of the innovation engine on the GoPro side. You mentioned the new app experience. So I'd love to -- if you have any further comments on that, I'd love for you to share them, just in terms of what value you think you bring to non-GoPro owners, to smartphone owners or what pain point you're solving. And then just more broadly for your platform, where you think there are other pain points. And then how you can solve them through new hardware, new software features.

Well, I think that all of that ties back to what is our vision for GoPro going forward. And if you ask me a few years ago, 2 years ago, what was our vision for GoPro, it would have been a much more camera -- GoPro camera-centric vision. We want to help the world capture and share experiences that only a GoPro can capture. And as we've developed our app capabilities and expanded our world view of who we can serve and who would be -- we would be genuinely good at how we could be generally good at serving additional customers. We recognize that we have an opportunity to be the company, be the brand that helps everyone get the most out of their personal photos and videos, not just people that buy a GoPro camera. And it's because we all share -- whether you're a GoPro customer or you just use your smartphone, we all have -- share a lot of the same problems centered around, like, how to make sense of just the vast number of photos and videos that we capture. And you talk to anybody about how satisfied they are with the camera roll experience on their phone, and nobody is satisfied with it. We all know the feeling of seeing or capturing a great photo or video and looking at it wistfully before you close out of the camera roll app, knowing you're not likely to see that image anytime soon. And if you do, it's just because you kind of stumbled upon it, and that's not like the really satisfying content experience. These are our lives' most meaningful moments. It's why you captured it in the first place. And so to solve that, we totally revamped the GoPro App, and we've created what we call the Mural wall that you can post your best -- your favorite shots to from your camera roll or from your e-mail or from text, if somebody sends you a great image that you want to keep track of. Without even opening the GoPro App, you can send that image to your Mural wall. And you know it's there, easy to find and surrounded by all the other favorite images that you've sent there, and they're all in 1 place. And then tied to that experience is a deep suite of editing tools and auto video generation capability and so forth, so that for people that want to get more and do more with their personal content, they can. But even if it's just as a simple and fun way to curate your content and have it all backed up at original quality in the cloud and just finally answer this very pervasive problem, which is when am I ever going to make use of these photos and videos I take, the new GoPro App is the way. And so when you ask what other problems are there that we can solve for people, I think it all starts with, first, helping people manage their content. And so they come to you to engage with their content. And then at that point, you can layer on additional products and services to help them get even more out of their personal content and grow a really meaningful business in that way.

Awesome. That was super thorough. Brian, I'm going to shift to you a bit here just to talk about kind of the cost and margin side. So OpEx is running near all-time lows. You've become much more efficient in terms of your OpEx spend. Just what have you been able to do? How have you been able to do that while still kind of keeping this innovation alive and perhaps accelerating?

Yes. I think we've prioritized exceptionally well in the company, making the transition to D2C continuing to drive innovation and technology and then on our platform, and making those the priorities for the company and where we're going to spend. And then everything else becomes kind of secondary to that. I guess the one thing we would say is what we control is what we spend. And I think we've proven we can keep -- to be more efficient, getting OpEx from $700 and something million a few years ago to under $300 million last year, while still driving innovation, I think, is pretty darn good. Actually, we guided 2021 up slightly in OpEx. It will be the first time in 5 years we would increase OpEx. And again, it's for innovation and technology and some of our new products, definitely on the platform and software and some of the things that Nick had just spoken about. And we'll leverage SG&A to be able to make those investments and hold the line on OpEx to drive basically operating leverage and expansion in the model.

One thing that I would add to that too is even with our new software and subscription initiatives, they're all based off of what we're already building through the GoPro community. And so we're getting tremendous leverage out of our development investments. And so it's not like we have to school up new teams and make all these new investments to go serve smartphone users, it's really -- we're just adapting our app experience here and there to be more relevant to non-GoPro camera owners and there's a tremendous opportunity and a tremendous amount of leverage there. So that's -- I think that's an important thing to know.

No. That's great because it feeds right into this next question, which is, you have the mix in of subscription, you have the DTC mix shift, both that are positive tailwinds for margins. And so clearly, your margins are set to step-up this year. Should we think about 38% to 39% being the long-term margin opportunity and from a gross margin perspective? Could it be higher obviously as you mix in more subscriptions? Just any way that we can think about kind of the long-term trajectory of margins as you sit here today.

Yes. No, they can expand. Included in the 38% to 39%, we're still building some products in China that has tariff. And that's embedded in our guidance for the margin. As we shift that around, that definitely helps on the margin front. As we -- the subscription side of it, the growth there and the new app experience and with Mural is another area where that's not really in our guidance, right? So that's upside. And the new app is going to be -- our expectation is it will be just as profitable as the current subscription model for GoPro. So that's another expanding and EBIT expanding opportunity for the company.

Awesome. So I kind of want to finish with capital allocation. And so clearly, this mix shift to DTC has been beneficial for your cash generation. You ended the year -- you expect to end this year with $470 million to $500 million of cash on your balance sheet. That's a company record. I know some of it is earmarked for the 2022 convert. But just how are you thinking about capital allocation today or into the future as you do have a better cash profile than you have had perhaps in recent years?

Yes. No doubt, the company's balance sheet is in a -- just really good position. We haven't been in this position for a number of years, generating -- we had cash flow from operations of over $200 million in the second half of '20. And we expect to generate $150 million or so in 2021. So we are generating cash. And some of it is earmarked for some of the debt repayments. We've got $125 million to repay April of '22. As we hit kind of those numbers, there is the opportunity as we look ahead into '22 and beyond to do more with that capital, share buybacks could be on the table. We don't expect to do major M&A. If we did any, it'd be smaller in the -- more in the software realm than in the hardware space. Small tuck-in, we do that periodically. So that would be kind of the use of cash and proceeds.

Awesome. We have 1 minute here left. I just want to go back and touch on the subscription offering, clearly because it's becoming much more important for you guys. So that is -- you've had success in keeping customers on the platform. You've had success in acquiring new customers. You're adding new features. Is there an opportunity to raise prices? Or is that not something that needs to be considered? Just curious how you guys think about that.

I didn't get the unmute unmanually. I mean in the future, it's always an option, right? But it's one that you make sure you do your homework on. You don't want to get that one wrong, remember it happened in Netflix at one point. So when we feel confident that retention rates are phenomenal, we're just bursting at the seams with value, then that's an opportunity. But that's an opportunity that we really need to earn. And it needs to be abundantly clear that, that financially makes sense. It's all about value for the end user. And so when we have created so much value for the end user, and we're helping them be so successful that we've earned the right to eventually one day raise prices, is that something we consider? Sure. But that's not really on the horizon. Near-term horizon.

Okay. Awesome. So listen, we're right at 30 minutes here. I really appreciate you guys both taking the time to sit down and virtually chat with me here. Look forward to having you back again. But thank you very much for your time, both of you.

Thanks. Back at you. Appreciate it.

Appreciate it.