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

Hello, everyone. It's so great to see you virtually. I wish we were in person on stage here with GoPro. Unfortunately, due to the COVID virus, you know this is all being done virtually. We have over 200 companies during 3 days here at Citi's global technology conference. A few housekeeping items, please note that no press and no media are allowed on this. If you're press or media, please disconnect immediately. If you're an investor subject to MiFID II, please ensure you have the applicable research agreement in place. And there are disclosures that are associated with this on the Citigroup website. I want to now turn the time over to Brian McGee, the CFO to read the safe harbor. Brian?

Thanks, Jim. 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 on our most recent annual report on Form 10-K for the year ended December 31, 2020, and Form 10-Q for the quarter ended June 30, 2021, which are both on file with the SEC and as updated in future filings. I'd also like to introduce before we get started, I have Jalene Hoover, who joined GoPro as our VP of Investor Relations. I'm excited that she's joined the company. And so as she and really -- she's really happy to join the team and looking forward to reaching out to investors and covering analysts. With that, Jim, let's get it going.

Thanks. I want to introduce who's all representing GoPro, and that is Founder and Chief Executive Officer, Nick Woodman; as well as Chief Financial Officer, Brian McGee. And we're going to have a very interactive discussion. If you do want to ask a question, press a little button on your screen to say, ask a question, and then I'll get an e-mail of those. And then if there's time, I'll put those all together kind of under 1 or 2 subject topics, and I won't say who's asking the questions, so that way you feel more comfortable asking it. But gentlemen, Nick and Brian, I got to say, I don't know if you have a crystal ball or what, but when you did this big shift of go direct-to-consumer, it was before COVID hit. And now that COVID hit and people stop going to the mall and airports and the duty-free shops, looking back, what an impressive decision. Do you have a crystal ball or what led you to this decision?

No crystal ball, but we do love what we do. And when you're that passionate about your work, you get good at it. And you have a feel for where your business is headed. You have a feel for what your customers' value. And then you -- if you are really focused on super serving your customers to deliver the most value you possibly can, eventually, you get it right and you get the type of business performance and results that we're seeing today. It is true that we started to move our business to be more direct. We were already growing our subscription business impressively before the pandemic. But as things happened, the pandemic served as a ironic positive catalyst for our business as it gave us a kick in the backside to make bigger changes more quickly than we were previously planning. We had no choice, but we already had the strategy. We just put it into plan over 3 months instead of over 3 years, which was literally what happened. And as a result, we much better positioned our business not only for the pandemic, but for our end users, for our customers, buying a GoPro, using a GoPro, being successful with the GoPro is much more rewarding from the point of purchase through the use of the product than it's ever been, and it's thanks to the outsized value you provide to our subscribers. And everyone's winning because it's having a dramatic impact on GoPro's bottom line. So we would never wish the pandemic on anyone, but oddly, it's been a positive catalyst for our business.

In addition to that, so I spoke about one of your changes of direct-to-consumer, you also did a big change about pushing to services and subscriber model. I mean my GoPro camera that I have at home, it was a one shop purchase. And all these other things that now you're selling today, the services and subscriptions weren't there. Can you walk us through about the steps in the history about abacus, I'll just tell say, the subscriber base, and we'll get into the details and numbers later, it's really catching on.

Well, to provide our subscribers with meaningful ongoing value. We really had to ramp up the value you're providing them post purchase. And the way that we do that is the subscribers get unlimited cloud storage, the footage they capture with their GoPro. GoPro today, when you plug it into charge, it will automatically connect to your home network and upload your latest photos and videos from the camera to your GoPro cloud account, so that later on, when you think of it, you can access that footage via the GoPro app, which we call the Quik app. Gone are the days of your footage being stuck on your SD card and whenever you want to review it, you think, well, if I had offloaded it from my SD card, I could actually enjoy this footage. Now your footage is going up automatically to the cloud if you're a go for a subscriber. We've also significantly improved the performance and feature set of the Quik app, which is the app that people use to connect to their GoPro, control it, access footage that goes up to the cloud, edit it, share it. That is phenomenal experience now, that's only going to keep getting better as we continue to invest in it. So the entire GoPro experience has become more streamlined, more modern and more intuitive for our users. So ultimately, they're getting more value out of their GoPro purchase, but also being a subscriber. Subscribers also save on future GoPros. So if you're buying one as a gift or another one for yourself, you'll save another $100 with each subsequent purchase up to 3 a year. We replace a GoPro, no questions asked. If you ever have problems with it, you get 30% to 50% off GoPro mounts and accessories at gopro.com. So if you're at all engaged as a GoPro customer, it really makes sense to be a subscriber because you're going to get a ton of value out of it. And as a result, we're seeing approximately 90% conversion rates, attach rates, I should say, of GoPro subscriptions to camera purchases at Gopro.com. That means that 90% of the people that are buying a camera at gofor.com are subscribing to go for us with $50 a year. That's terrific conversion. We're also really happy with the retention rates we're seeing churn is low. It's always been low, but we've continued to reduce churn even further as we've added more value to the GoPro subscription. So net-net, we couldn't be happier with how it's performing. We've got a road map to continue to add even more value on going for subscribers. So we expect the low churn and high retention trends to continue as we continue to super serve our customers.

And then Jim, let me add on to that. Just for investors, the subscription has been the fastest-growing product line that we had, it grew 211% year-over-year in Q2. And while there's tremendous value for the consumer, there's tremendous value also for the company and shareholders. It's also our highest margin product line as well at 70 to 80 points. So that's one of the reasons amongst moving -- shifting more to the high end, which was -- you talked about strategy earlier. It's been a strategy since 2018 to continue to drive consumers to the -- our high-end cameras where we make more money, clearly, driving direct-to-consumer up to the 40% or so range from 8 to 10 several years ago, adding subscription, that's driven ASPs up 13% on a compound average growth rate since Q2 of '19 to Q2 'of 21. And that's driven higher margins. We've controlled OpEx and seen tremendous operating leverage in the model as a result.

And Nick or Brian, has there been any change in the customer base pre-pandemic versus where we sit today? And the reason why I ask that is, I haven't been scuba diving in over 2 years. And I still have my patty license and certification, but I don't know when I'm going to go again, but yet I still have my GoPro. And so I'm just wondering, has -- you seen a change in behavior? Or I also turned on discovery channel last night, and there was some deadliest cat show of people catching these wild crabs, and they were like hundreds of GoPro cameras everywhere on the boat. And street car racing, there were hundreds of them. I'm sure they're not your core market of subscribers. But I don't know, I'm just kind of wondering about, have you seen a shift in some of your consumer behavior market pre-COVID versus now?

Well, people are traveling internationally less, but they're still staying active locally and domestically. And so you may not be scuba diving, but you're finding other ways to stay active. And on top of that, people are wanting to share experiences more than ever with people that they can't as easily get together with in person. So documenting your more local adventures with a GoPro to share with friends and family that you can't be with us easily is a highly meaningful solution. GoPro represents a highly meaningful solution to people that are in that boat. So I think it's trading one activity for another. And of course, we've made GoPros more functional during the pandemic, enabling our users to use them as a web camera. We launched a live streaming platform for our subscribers that's much higher quality than, say, streaming to Facebook or YouTube, and you don't have to have a 1,000 followers like you do on YouTube to live stream. That's another subscriber benefit. So -- and we do see our users using their GoPros in these new ways, which is great because they're getting more value out of both the camera and their subscription. But I think, clearly, the demand levels indicate that people are staying active with their GoPros just in different ways than they did before the pandemic. So that's great to see as we're seeing people become more active, traveling a bit more. It's important to note that while we've thrived during the pandemic, we haven't been a pandemic beneficiary. So as people do get vaccinated and as people do travel more, we think that's going to have a positive impact on demand. But until that happens, thanks to our more direct and subscriber centric business, we can still thrive amidst the pandemic. We don't need a recovery -- we wanted recovery, but we will benefit the more active and the more that the world starts to travel again.

Yes, I can definitely see from my family, we've done a lot more local hiking or mountain biking. And because grandma and grandpa can't visit us as easily, we share those GoPro video clips. You know what I mean. And so I guess, you're right, it's a change of use in behavior and at the airport, the other day, I did notice a lot of the duty -- well, almost all the stores were closed, the duty-free shop. So when international travel picks up. I imagine that, that will help out because people would love to buy a GoPro camera without all the taxes and tariffs.

Yes. Jim, on that point, so that's where we've been probably hit one of the hardest is in travel. And that's historically represented 5% to 10% of our total units we sell in any given year, right? People going to Bali or Thailand or Europe, whatever, they can't make those trips. And so they're not buying from us or best buy or Amazon or at the duty-free store that you saw are closed and cruise especially shut down. So that's definitely going to be a tailwind as the world kind of comes back, but it's not today, we've definitely been impacted. So because we get the question, well, when can you get back to more than 4 million units a year, and we're going to do 3.5 million or 3.6 million in that sold through this year, and that's what basically no international travel. So you start adding that back and some other things we're doing. And you can see a path over time back to kind of that 4 million-ish range.

Can you talk a little bit about the impact on your financials, whether it be your margins or cash flow as you've gone to this shift to direct-to-consumer as well as more subscribers?

Yes. I think there's kind of 4 components to this. Back in 2018, we looked at the business and the mix we were selling, and we made a conscious decision to shift more to the high end. I think you mentioned that earlier. And now we're running better than 90% at MSRP of $300 and more. Driving more throughout the consumer has definitely helped from an ASP and a margin perspective, subscription is our highest margin product. So that all is culminating into a company that's gone from low 30s margin with high OpEx to now 40 points of margin in Q2, and we've guided for to be 40 points or above in the second half. And so -- and controlling OpEx, has definitely led to an increase in profitability and cash flow. Our expectation from a cash flow perspective in 2021 is to get to be between 470 and $500 million. So that's plus $150 million of free cash flow this year. That's running 13% to 15% of revenue. I mean that's an impressive statistic on cash to revenue when bonds are yielding less than 1%. So we continue to see that moving forward. I think last year, in 2020, we had great cash flow, but that was really driven by result of profitability, but by really solid balance sheet management because the shift in direct-to-consumer, we've been able to reduce inventories, our cash cycle on accounts receivable is 3 to 5 days with credit cards on DTC versus 30 to 50 days on retail. So we'll continue to see that benefit as -- from a cash flow perspective as we drive more direct-to-consumer versus retail. So -- and as we pointed out in -- on the conference call in Q2, if you look at our trailing 12 months of profitability, we were profitable on a -- not just on a -- on both a GAAP basis and non-GAAP. And I think our EBITDA to revenue was about 13%. So we're definitely moving our company in the right direction. It's paying off with the consumer, and that's showing up in our financial results to investors.

Nick, following Brian's comments about the margins and cash flow, it's worth noting that you haven't slowed down your R&D and investments. You haven't. You've continued to put more money into services. So can you talk about -- are you at the point now with your services for subscription where you've kind of got everything you want? Or is there a lot of innovation still there that could happen? I mean I use the product, but I continually am impressed with the additional enhancements that continue to come out.

We're never going to be where we want, right? That would be a scary place to be. No, our road map goes out quite far, both in terms of hardware innovation that's yet to come from GoPro as well as in software, software being mobile, cloud and in the future desktop experience. There's an enormous amount of opportunity for us to improve the experience for our customers, whether they're a GoPro camera owning customer or they primarily use their phone or another camera for capturing their lives, we are focused on serving them. And we are now porting non-GoPro owners with the Quik app. And we've shared that we have ambitions to launch a desktop version of that because we recognize that many people who are passionate about digital imaging prefer to use a desktop versus mobile platform for managing, editing and getting the most out of their personal content. And we're primarily mobile at this point. So that's a significant opportunity for us. And we have experience in desktop. We had a desktop app for many years that we still have a surprising number of users, even though we haven't updated that product in quite some time, and we get a lot of requests to do so. So we think that eventually, desktop will be a meaningful TAM expansion and subscription expansion opportunity for our business. And so don't worry, there's no shortage of innovation coming from GoPro. And on the software front, we do see -- I get asked, where do we see ourselves from a competitive standpoint relative to other offerings that are out there? I think the easiest way to understand our perspective is, on one hand, you have the free ease and convenience of the content management and editing tools that you have on your phone. And on the other end of the spectrum, you have the very advanced yet steep learning curve of products from companies like Adobe. And in the middle, we see a real greenfield opportunity for GoPro to serve consumers with very powerful tools that you can use to make professional quality looking content. But that the tools are very easy with a shallow learning curve so that people can take advantage of them without taking a course like you have to do with so many products that are out there. We think it's a rather untapped area of the market, and we think it's one that our brand and product development expertise is really well suited to take advantage of.

Yes, I can say how intuitive that an easy to use your product is, it is quite appealing. When we think about your direct-to-consumer, how do you balance that with, say, the Amazons of the world and the big-box retailers like Best Buy? Like when I still go to Best Buy, end cap, big signs when I walk by, there, hey, Mr. Suva, they don't know my name, but hey store, can I help you? What are you trying to look at? They're all over me and pushing the product. How do you balance the direct-to-consumer with still having a retail presence? And also many people just like to go to Amazon and buy everything.

Well, our retailers do a phenomenal job of selling all of our products, but they're the best at selling our entry and mid-level products. And gopro.com, we are very good at selling our highest end products, most expensive products, but we're not very good at selling the entry to mid-level products. And so that leaves that entire business to our retailers. It's a really good diversification of distribution of our products that keeps all of the constituents, all of the retailers, GoPro.com included very well taken care of. So the way that it works is our -- I would say, most strategic, largest retailers will get some access to flagship at launch. And then over the course of the flagships lifespan we'll begin to open up distribution of that to other retailers over time. So eventually, everybody profits from the strength of the new flagship camera, but we do that over the course of the first year of the product's life cycle. And that, in addition to the retailers having a very strong entry and mid-level business with our products is everybody's GoPro business is growing and everybody stays happy. It's also helpful that GoPro is the brand leader in most of the markets that we sell-in. So we're able to drive a significant business for our retail partners, even though they don't always have access to the flagship.

Yes. And Jim, I think I'll add to that is the other thing we've done is timed out what retail partners sell GoPros. And that's actually shifted more of the retail business into some of the best lives in Amazon and the others. And so while we've taken clearly a higher amount of share going direct-to-consumer, as Nick has pointed out, our retail partners who are left are more profitable ones, and they are getting a bigger piece of what was the retail pie. And so they're actually seeing growth as well as opposed to shrinking because we've reduced distribution. So it's actually -- it's a combined effort that helped to manage gopro.com as well as our retail partners that's really benefited both actually.

And speaking of which, when one travels and sees the world, you can't help but notice there's a lot of GoPro imitation cameras out there. How do you keep the knockoff brands from gaining share? I assume it has to do with your services and software programs. But any thoughts on knock off, but it seems like you continue to innovate, whether it be image stabilization or refresh frame rates or battery and lighting. Any thoughts about how you continue to keep the knockoff still quite distant?

Well, I mean, you said it, there's a number of fronts that we maintain a performance, quality and ultimately, a value proposition to edge over competition. But as you're referring to knock offs, they're sold at price points that we don't compete with. We've learned over the years that the most profitable GoPro, the strongest GoPro is one that focuses on the higher end of the market. It's why we've been able to grow our business in terms of revenues, ASP, margin and investing in a more valuable end user to GoPro with a better lifetime value return via our subscription approach. Net-net, it's just much smarter business for us to focus on the higher end of the market and not worry ourselves with low price knock offs that, they're not -- we used to pursue a lower entry-level price point customer. It's just not a very lucrative business to be in, the return is the juice isn't worth the squeeze. And so we'd much rather focus our developmental energies, our marketing energies, are super serving our customer energies on the higher end of the market, both to do a better job of serving that higher end customer while delivering much better return on investment for investors. It's proven to be smart business. So while you do see knock offs out there when you're traveling, the businesses that we're making, those knockoffs aren't making much money, and they're not putting much of a dent in our business at all, because we just don't play in that category.

Yes. And I would add, every time I think about, hey, the current one that's on my ski helmet, it can't get any better. All I got to wait is until the newer version comes out, you're laughing, Nick, but that's my thoughts on always.

Well, another point, you mentioned watching the discovery channel and seeing GoPros all over the place. Those are GoPros you're seeing all over the place. And when you watch film, other film and television, those are GoPros that are being used. So it's beneficial that we focus on the high end and deliver such professional quality results because many of our customers are film and television production companies that, on behalf of all of GoPro, thank you, film and television producers for choosing GoPro because as long as you keep promoting our brand and business and driving awareness, we'll keep making amazing cameras that you can use for your production to get such good results. It's a win-win situation for all of us.

Yes. And I guess they put up dozens or even 100 cameras just looking for the 1 or 2 great angles or shots that the opportunity has come and gone.

Yes, it's something that we could do a better job of talking about is that we're not just in the consumer business. GoPros are bought in large numbers for, again, professional film and television production, commercial purposes, whether it's Rocket Labs using GoPros to test and document their propulsion systems to -- we've all seen GoPros being used in the international space station and going on space walks. It's yes, we build an incredible consumer product, but it's of such professional quality and durability and versatility that it is the standard camera of choice for anybody that's filming anything that's difficult to capture. And so serving that very functional role in the world has yielded a very durable business for GoPro.

We're approaching Christmas time, not too far away, yet many companies yesterday and today talked about supply chain component shortages, higher shipping [ cost logistics ], inability to put together all their parks into their product. Your product, big time for Christmas needs to be on the shelves. Can we talk about your ability to procure everything you need around the supply chain to make sure the product is on the shelf or shippable to customers.

Yes, Hi Jim, this is Brian. I'll take that. We've talked about this at length. If we go back and you talked about earlier the crystal ball, the one piece of crystal ball we've had is going back to Q2 of '20, predicting our business and how we were going to shift it and the product transitions and where we thought demand was going to be. And we've largely been right about that. And we got ahead of it before I think others did, and that's paid dividends because we've been able to have our forecast out into supply chain that has stayed very consistent. And so getting ahead of the curve has definitely helped. It is true that component supply continues to be a challenging environment for sure. And that said, we think we've got enough supply to meet the projected revenue we've guided for in the second half of 2021. And so despite the challenges, we think we're going to have product on the shelf, and we'll have it for the consumers who come to gopro.com. Now with the supply shortages, though, that probably limits a lot of upside as well because there's only so much you can get, and that's probably true across all of consumer electronics. That's not just GoPro phenomenon. I think we have more demand than we can probably supply, which is a good thing because that will keep channel inventories low. We'll still have phenomenal growth of nearly 30% year-over-year, continue to drive margins into the 40s for 2021, a range we haven't been in since 2014 or 2015 and bring on terrific earnings per share and cash flow. So despite the constraints in the environment and supply chain in COVID, there continues to be strong demand for GoPro, strong demand at the high end. And that's really transitioning our business into a much more profitable company and that's pretty exciting.

We've got about 6 minutes left. So I'm going to ask you both the same question, and I'll have Brian go first and then Nick to round it out and close it out. But what's maybe the -- maybe 1 or 2 or most 3 things that you want to leave investors with today about why they should be buying and owning GoPro stock and maybe Brian, why you're so excited to be CFO and Nick, why you're so excited to be CEO. But let's start with Brian.

Well actually at CFO and COO. So actually, both roles actually worked, I think, well together for GoPro and so I think that's been good for the company. I'm excited because we see -- continue to see strong demand for our products and our services. We continue to drive innovation, stabilization, editing, the subscription, the camera innovation, driving more on the high end and being much more profitable is a massive moat that gives us such a competitive advantage, but really leans into the consumer who really benefits from that. And that -- this whole transition has not only worked for them. It's working for the company, and it's working for investors. And just look at the EBITDA we're generating and the cash flow, particularly to revenue and that's an exciting story.

Nick, over to you.

It's a great question. I'm surprised we don't get asked that more often. So good on you for asking it. I mean I love what I do. This GoPro has been -- I feel like GoPro is an extension of my own life in many ways. And so it's very authentic for me to come to work every day and work on the problem-solving that we do because their problems that matter to me massively. Their problems that matter to my friends massively, whether they're athletes or their dads or moms wanting to document their families in a manner that just makes everything look amazing and celebrates the incredible experience that is life. That's an important role that we play in the world. I think that when we have great-looking footage of ourselves doing what we love in life, it validates us. It makes us feel good about ourselves. It reinforces our passions, our interest, our motivation and ultimately helps us live more fulfilling lives. And so I'm hugely happy, proud, honored, excited to be a part of a positive movement like that in the world that ultimately helps people fully realize themselves and celebrate themselves in that way. So rather than having slow mo about somebody else's life on social media with a GoPro, you can go capture your own experience and celebrate yourself in a way that I think is really important in today's world. And on the business side, I love the fact that our business is stronger when we focus on higher end, higher quality solutions for our users. It's really fun as a product developer in both hardware and software to be focused on just this peak performance, peak convenience, peak experience for people, for customers who are willing to pay for it. It is really rewarding to make amazing products that people are willing to pay a premium for that then allows us to take those profits, reinvest it into further innovation to continue to drive the business, the product experience and the brand even higher. It becomes increasingly difficult to compete with a business that's focused on those things. And that just feels authentically GoPro and is something that I'm very proud to be a part of. So -- and that's why I think investors should be excited about it, because consumer interest in digital imaging, personal experience, capture and sharing, this is a megatrend that is not going away. In fact, it's just going to build as humans become more and more excited about visual expression, GoPro is, in my opinion, the most exciting digital imaging brand out there. We're not just a hardware company anymore. We're in software and services as well. And I think better than any brand on earth, we can get consumers excited about our products and services. We're a marketing powerhouse that's backed by incredible engineering and product design. So -- and we finally have figured out the best way to leverage all of that talent and drive a growing and profitable business, thanks to our D2C and subscription strategy. So exciting times and a lot more to come. This party doesn't end anytime soon.

Well, I want to personally thank Nick and Brian for joining us from GoPro from around the world literally where they are. And I really appreciate you being so authentic in helping us understand the investment thesis in case. Thank you so much. And this now concludes our fireside chat with GoPro. Thank you.

Thank you for giving us your time.