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

Good afternoon, everyone. My name is Erik Woodring, IT hardware analyst here at Morgan Stanley. I am pleased to be joined by Brian McGee, GoPro's CFO. Why don't we start quickly with the safe harbor announcement from GoPro, then I'll give my disclosures, and we'll move on from there.

Great. Thanks, Erik. 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 our 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, 2021, which is on file with the SEC and as updated in future filings.

Perfect. Thank you, Jalene. And at least on my end, 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 rep.

Great. So with that, let's get started, Brian. Obviously, thank you for being here. You've been around GoPro for a very long time. So maybe we'll start from the top here and review 2021, because in many ways, the GoPro we saw in 2021 was different from the pre-COVID GoPro. Revenue was growing, margins were expanding, your subscription business accelerated, you generated record cash flow. So let's put all that together, what would you attribute your success to last year?

Yes, it's a massive plug. Thank you very much. Look, it's execution. We set up the business back in the second quarter of 2020, when COVID hit and we immediately said we were pushing in a direct-to-consumer business, and we already had a nascent subscription business, and we said we have to go hard go fast, and we did. And by the time we launched HERO9, we did that with a bundled subscription, that took our subscription numbers -- tremendous growth. I think we ended about 70,000 or so subs -- 750 subs in 2020 and ended up 1.6 million subs in 2021. So massive growth on subscription, together with supply chain hit, we had enough product, and we shifted our product mix to the high end, mostly HERO10, our MAX product and a bit on 9 and some on 8 to help some of the lower price point, but it mostly shifted up, right! So we ended with terrific ASP growth on a year-over-year basis. We ended up, I think, at $388 ASP, combination of product going up, selling more accessories, and we ended up with $54 million of subscription revenue that also boosted margins, as you had mentioned. So 41.4% margins. We haven't been in the 40s in margin since 2015, when we were shipping 6.6 million units. And actually, we shipped, I think, 3.2 million in '21 and made more money in '21 in absolute dollars than we made in 2015, shipping half the unit. So it's not about tonnage, it's about how do we get the right value proposition to the consumer, continue to innovate and that innovation, particularly in hyper-smooth video technology got us an Emmy. So we're getting recognized for the innovation we're bringing to the market. And that yielded $0.90 earnings per share on a non-GAAP basis. record cash flow, $211 million, that's 18% of revenue. Everything came together in 2021, and it played out exactly how we kind of foretold it back in February, and we kept bumping up our numbers as we work through the year. So '21 was terrific. And '22 is going to be really more of the same, driving to the high end of the market, continuing to drive subscription. We said, I think on our conference call, we'd be at 600,000 units to sell-through in Q1. I think we're on track to do that. So we're right there. Subscriptions doing well. As a matter of fact, we ended -- on our subscription business, there's 2 dynamics to it. on gopro.com, we bundle the subscription. So we get about 95% attach rate there, very high. Retail was much lower, but we lifted that to about 25% by Q4 of 2020, up from about 7% in the prior year. And now it's running 30% to 40%. So we continue to lift the attached retail, which is a very important barometer KPI for us to drive the business. So that -- and we have a goal of reaching 2.2 million subscribers in 2022. That's going to be up 40%. We think we're on pace to do that. We're certainly on pace to achieve what we expected in Q1.

Perfect. So that was really helpful. I'm now going to jump around, because you gave some interesting information there. So the 30% to 40% retail attach, I was going to ask you how you got from high single digits to 25% retail attach, which was impressive. Now you're talking about that being even higher. So what's just driving that higher retail attach? And where could it go?

Yes. As we looked at it, the consumer, if they're going to buy at retail, they're going to pay $100 more for the product versus gopro.com. So we're at $4.99 for HERO10 Black, including the subscription at gopro.com, it's $500 at retail. On the App Store, we took the pricing from $50 initially down to $25, and that's -- we've seen the elasticity there on retail. So definitely, prices helped -- value proposition will help continue to drive that. And the second year, they have to pay the $50, if they want to stay in it. And so as a reminder, it's unlimited stores. You get discounts on accessories, discounts on next camera purchases, you break it, we replace it, right? So it's a financial incentive for the consumer for sure. We'll change that over time, the financial incentive will stay there, but the value proposition will get better in terms of how the consumer engages with their content. The capture, they have it done. And you get your content up to the cloud. But if you want to edit, you got to go cloud, download to your phone, and then push it back to the cloud and share it. We'll work to have you do, just edit in the cloud, that's one spot, it's more easy. We'll share some instant videos for you. So your content goes to the cloud, you get a feed instantly to your engaging. So the point is, that you have the value proposition, but the engagement aspect will be even more improved, as we look through 2022.

Okay. That's perfect. And then maybe you've gone now through 2 quarters, 2 successive quarters, where you've been able to track churn of kind of your earliest bundled subscriber cohorts, after they renew for the first time, after they renew after their first year passes. So what can you tell us about what you're learning about these cohorts? Are they any different? What are some of the trends that are -- that you see in the market with them?

Yes. Actually, the trends between the 2 cohorts, one being the consumer who bought on gopro.com and got the subscription as a bundle versus they bought it at retail and they came in and got the subscription. The cohorts behave the same. The retention rates are the same. Their content of pushing to the cloud is basically the same, what they pulled down from the cloud to edit is the same. And so that's been a real plus. And the change has been or retention has been quite high, it has been quite good. And that's been -- one of the things that has enabled us to stay consistent in how we track it and how we give kind of forward-looking kind of guidance around it. I mean it's also important to know, that while our margins of 41.4%, about -- in 2021, about 200 basis points of that is only solely due to subscription. I mean it's 5% of our revenue, but that 5% of our revenue at $54 million is generating 70 to 80 points of gross profit margin. And operating profit is in the 25%, 30% range. So the more -- the faster we grow that, the better we're going to do on margin, better we're going to do on cash flow and profit. So it's definitely a major contributor to the company.

Right. Right. Perfect. And then maybe one more on the subscription offering. Now that you've been able to see these cohorts renew, what do you think of the future, the specific futures are within the subscription offering, that really are getting a subscriber to say, I want to be around for year 2 and year 3 and so on and so forth?

Well, clearly it's the financial benefits. So those who want to buy the next new camera, they're going to save $100. They're getting up to 50% off on accessory purchases. But even more important on the retention, and we see this, the more content that's going up in the cloud, the more usage, the stickier it is. So there is a tonnage aspect to cloud storage. That is paying off, and we can see it in retention rates. So that's one. Two is, we continue to migrate the consumer from a monthly subscription to an annual subscription, because the attach rates are better and the retention rate is substantially better. And I think recently, we eliminated kind of the free tier or the 30-day trial. And now it's, you buy it, you're now a subscriber, with full benefits and you are now a sub, not a -- so all that is really working to -- for the benefit of the consumer, but it benefits GoPro, in terms of its financials, and then hopefully, it's rewarding shareholders.

And is there any -- as you're kind of doing this migration, is there any opportunity to perhaps meet your capitalist and raise prices and capture even more margin upside, or is that wait and see and we'll see how the subscription progresses over time?

I think from a subscription perspective, we have 2 today. One is the GoPro subscription that we've just been talking about, where we ended at $1.6 million in 2021 and want to be at $2.2 million, up 40%. There's also the quick subscription, which is a completely new market. It's a new TAM and it's all for smartphones, right? So -- and there's a lot of people who capture a lot of content on the phones, and they need a vehicle to edit, and they want to do it on mobile. And so we offer that to the consumer at $10 a year, you get unlimited edits. Those edits go up the cloud. We have a mural, which is kind of like a favorites, if you will, where you can capture your best content, hold it and put that in the cloud -- and so that's another value proposition for the consumer. That's a new TAM for GoPro. I mean you are talking about 1 billion phones a year, people capturing a lot of content, that's an opportunity for us. And we're well over 200,000 subs, even on Quik.

And I was going to ask what's the consumer feedback been for the updated app? Obviously, you had 2, you kind of condensed it into one. You've now obviously kind of changed the dynamics behind the app, but what are you hearing from your customers, in terms of most frequent usage of certain features or improvements that they like or anything there?

I think you see it in our retention. Our retention is strong, and so people are using it. And that's the advantage we're seeing in the engagement aspect. And that's what we want, is we want more engagement from GoPro. And that's the other advantage of being on the high end, we get the focused engineering resources on driving more software, more stickiness, more use around how we use the camera. And with our latest GP2 processor, we're able to do 5.3K 60 video versus HERO9 which is 4k 60. But the differential in megapixel is up 91%. So the picture quality is massive, way better, HyperSmooth 4.0. The video stabilization is like way out there. And again, that's why we got to Emmy. So...

No, It's amazing.

The value proposition is there and the consumer is buying.

So we've spent half of this time already talking about subscription, which is awesome. I'd be remiss if I didn't ask you about the cameras. And so you guys made kind of a special announcement at earnings, earlier this year. You talked about enhancing the ecosystem, not just from a software functionality perspective, but launching 2 'derivative cameras.' And so that would effectively double your product lineup, so to speak. So maybe a 2-part question; one is, just from a hardware perspective, where do you think the customer sees pain points and where are you trying to improve those pain points? And then 2, any details you can share on how we might think about how these cameras might fit into your lineup?

Yes. I think we'll have the traditional HERO camera and there will be another one, we have MAX, which is our 360 camera. And then we did talk about 2 additional ones, and they are derivatives of the main product. And in some cases, it's going to be some modifications and again, with more software. So if you think about where GoPro is evolving, I mean, we've traditionally been this hardware company, and built great hardware. It's phenomenal hardware, right? It's the brick, they don't break, which is great. And they take terrific video. But now we're chasing that to be -- that's still going to be -- that's the cornerstone of the company, and adding the subscription element is massive for the consumer, having more services, having more software that makes it sticky, makes it easier to use the camera from a UX/UI perspective, get content to the cloud and actually be able to get it easily and share it, is that's the next holy grail for GoPro. So it's software subscription and services, but easy content use. That's going to be a winning formula.

And any way we should think about potential price points? Obviously, you've had a lot of success at the higher end of your lineup, not just because of COVID driven kind of manufacturing situation, but I think you could look back at plenty of your last earnings and saying 90% plus of revenue has been generated from cameras over $300. So any price point, any inklings that you could share with us?

Yes. The price point piece over time, we've looked at prices, to the point where if you went back to, I think the '17 or '18, about half of what we sold was above $300, and about half was below. Last quarter, I think 100% was $300 and above. But we also put a new metric in and said, hey, cameras at $400 and above were 85%. So it says we've able -- we have been able to successfully shift the market up in value, because we have the value proposition there. We've proven that out, and we've driven the volume and gotten the profitability and cash flow from that, and that's important. I think the newer products will continue to think about those as being high end, because what they deliver in terms of value proposition for their specific use cases and TAM, and market expansion, we'll be able to generate that.

Okay. That's perfect. How do you guys think about the competitive landscape? Do you believe the competitive pressures in the market are increasing or decreasing? Maybe what are your competitive advantages versus some of your competitors?

I think if you think about GoPro and the moat, it's the brand. So when people think about the category, you're going to think GoPro, kind of like Kleenex, and [ it was like ] yes. as like. We are the category in action camera. We've got the hardware, but also the software and services that come with it. And so each one of those just builds a bigger moat around GoPro for the consumer and for the shareholders. So we've had competition come in and go out, and we've continued to evolve the category. I think -- and we've innovated, I think HyperSmooth is a perfect example, and we've done our own chipsets, which enables us to control the firmware experience, the software experience and improve just the camera performance even more, and that's all working to the advantage of consumer, who continues to buy GoPro.

Right, right. So you are the CFO, I'd be remiss, if I didn't ask you some of these number questions, right? So maybe, as we just started on 2022, you mentioned you're doing more with less so to speak, because you have the subscription bundle. You've guided to mine yourselves through declines in 2020, obviously -- in 2022. Obviously, a lot going on this year between inflation, rising rates, geopolitical tension. So maybe help us understand, how GoPro is thinking about the world in 2022, and have you factored in, for example, the return of international travel? Any kind of description of some of the factors that you guys think about, when you think about software in '22.

Yes. Actually, if you went by our guidance, we expect revenue to be up, both in units as well as ASP. So we'll continue to see ASP lift. That's coming from the high end as well as more revenue from subscription. We also expect sell-through to actually be not down. So both sell-in and sell-through will be up on a year-over-year basis, that's our expectation for 2022. Channel inventory largely balanced. To think we have it -- back at the right spot, around 600,000 units, that may move here and there in the quarter, quarter-to-quarter, but I think balanced on the year. And so that puts us in a really good spot, from that perspective.

And you've even talked about, though, that there's been a lack of international travel historically, that has been an upside driver for you guys at least, that perhaps that's coming back, maybe this conference would help indicate that maybe it is coming back. But is that factored into the way you think about the world in 2022?

It's not yet. I think 2 things, if you looked at our guidance for '22 has, maybe the potential for upside. One is, we left our percentage mix between retail and direct-to-consumer basically flat in '22 to '21. So we were at 34% direct-to-consumer in '22, up from, I think, 32% in '20. And so, that will hold, and international travel, we did not build into our numbers. So if a lot of people start going to Southeast Asia on vacations and other exotic places, that -- or a cruise, that will feed duty-free, that is upside to our business in '22.

Okay. Good. How about -- let's kind of talk about the cost and margin side, because you grew OpEx last year, you're investing back in the business. You talked about innovation, software, services, subscription, in addition to the work that you're doing on the hardware. So maybe just -- how should we think about the pace of OpEx growth going forward, and are there any kind of incremental costs associated with some of these new derivative launches? Are these bigger bets? Are these smaller bets? How should we think about them from kind of the cost perspective?

Yes. The derivatives are very small bets, so the ROI is very high, because it's in the main platform, where you're spending the money and the derivatives, they're pretty inexpensive to do. And a lot of that is actually in software, so that drives a lot of benefit for the specific use cases that we're going to be going after. I think we've guided OpEx up from between $340 million to $350 million in 2022. That's up, I think, 6% from 3.25% in '21, and most of that's going to be in hardware innovation, software and more on advertising, to drive demand, and a bit on just improving the gopro.com experience and everything else gets kind of held together.

Okay. Okay. Something you alluded to earlier was -- with the mix towards subscription, you are seeing upward pressure on gross margins. You saw upward pressure on EBITDA margins. You're seeing a mix shift towards D2C, although you guided flat year-over-year for 2022. So some nice tailwinds there from a margin perspective. How can we think about your margin trajectory, as we look, again, maybe 2 to 3 years out beyond 2022? Is that something where we should continue to see uplift, and any puts and takes that you can help us think about that?

Yes. I mean, I don't know the upward in pressure kind of...

Upward lift.

Upward lift. It's usually downward pressure. But we've definitely had an uptick in margin, and maybe we were down in the low 30s. Now we're in the -- solidly in the 40s, right? So -- and we expect to continue that. We have a longer-term model at 40% to 43% on margin. I think the guidance was around between 41% and 42% for 2022. But if travel comes back, it's going to be mostly in high-end cameras, because that's what we sell. That's going to be a margin beneficiary. If D2C does better, that's a margin beneficiary, better in the sense of percentage of revenue, right? We factored in component costs, upticks in our margin guidance...

Those -- my next question, so you...

Yes. And so that doesn't occur at the rate we have planned for, that's maybe upside. Now there's the other side of that, that's higher, then that's a hit. But we'll do more in diversifying our supply. So we'll be producing in Mexico again, and we're producing in Thailand. So that's going to help with tariff avoidance for the U.S. So that's a cost benefit that's factored into our guidance already. But those are things that we're doing. So yes, on balance, we feel pretty darn good about 2022 and how -- it's a continuation of '21, but with more products and expanding the TAM. Right.

Okay. Capital allocation, you guys are in a much stronger cash position than you were, let's call it, 12 to 24 months ago. You recently authorized $100 million share buyback. Help us understand what are the capital allocation priorities for GoPro, on a go-forward basis, buybacks, any change, anything outside of repurchases we should think about?

Yes. In April of this year, we'll repay one of our converts. We have 2. So that will be a $125 million use of cash. The second convert is due November 2025, that's $145 million. That's 4 years out. So yes, we have some time here -- over 3 years. We have some time there. The $100 million capital allocation for stock buybacks. The goal there is to make sure that we buy back at least what we're issuing on a net basis for dilution for employees, and if we can go deeper. That's great if we have the cash. Happy to say that, we've already bought back about $10 million of stock in the first quarter. So we've not only announced it, but we've executed on it as well.

And then how about M&A? It's been a few years since you were really active in the M&A market. You've made little tuck-ins here and there. What's your appetite for M&A today? What kind of acquisitions would you look for hardware focus, software focus? Any specific size of the sweet spot?

Nothing specific, although we do M&A, but we've done it on a smaller scale. About a year or so ago, we bought a company called ReelSteady GO. And that's a market we got out of, which is drones. It turns out in the FPV and racing space, the drones, very quickly -- it's a market that's growing really quickly. They like to use GoPros. And we already have really good image stabilization with HyperSmooth, but you can take it that next step further on desktop with ReelSteady GO. So it's using GoPro content on desktop, with ReelSteady that enhances your video performance, that you captured on drones. So it's a way for us to get back into the drone market, in a very inexpensive way, where we'd actually make money, not like, getting clobbered.

[indiscernible] Right, right. So you've been involved in a long-standing patent infringement dispute with a former competitor of yours. Last Friday, there was a filing in the case. Just want to give you an opportunity to provide an update, kind of on where things stand today?

Yes. No, thanks. We've talked about this a couple of years ago, right? And it was -- this lawsuit came, I think, in 2015, and going -- as long as I've been at GoPro. [ Victory on ] Friday, a federal court granted GoPro's motion for summary judgment, invalidating all patent claims suited against it, by nonpracticing entity Contour IP Holdings and those, again, date back to 2015. So it's awesome. The judge dismissed the case, we don't infringe.

That's great.

That's really good news for the shareholders.

Definitely. And so we have a bit over a minute now. And so I just want to give you an opportunity to explain to the audience and those that would be listening in, maybe what's most underappreciated about your story today? What -- why should people consider an investment in GoPro stock?

Yes. We're the leader, and we're the leader in an area of, where people want to capture and share their life experiences. And we're just making that better. The image quality is an innovation that goes into our hardware and software. It is unbelievably good. We've created that moat. And now we've got the subscription service and other services that are going to go with it. And that's going to continue to fuel growth through our gross profit, drive our operating margins, which we are running about 13.5%, 14%, which is quite good and generating $150 million, $200 million of cash flow that we can then give back to the shareholder in a nice return. So we've got, I think, a terrific roadmap over the next 3 years, diversifying the product line in both hardware and software, and that's going to yield our expectation, that's going to yield to our financial results, top line growth and cash generation and that innovation is key. We'll continue to drive innovation on both hardware and software, and that leads to a great business and also why Outside Magazine rated us one of the top retention companies for employees. And our attention has been terrific. Employees want to stay, because they're happy, and we're growing, and that just -- that vibe feels like awesome.

That's great.

I'll leave it on that.

That's a perfect way to end it. Brian, thank you very much. I appreciate the time.

Thank you, Erik.