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

Welcome. Good morning. My name is Paul Chung. I'm the applied and emerging tech analyst here at JPMorgan. And I'm pleased to have with me the CFO, COO, EVP, any other titles I'm missing, Brian McGee, here. But before we start, we have Jalene provide the safe harbor.

Thanks, Paul. 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, 2021, and Form 10-Q for the quarter ended March 31, 2022, which are both on file with the SEC and as updated in future filings.

Great. Thank you for that. So just to start, let's talk about the kind of evolution of the business model, how it's become more consistently profitable over time. You're in the mid-teens EBITDA now on track to hit 15% again this year. So what are some kind of key contributors to this strong performance over the years?

Yes. Thanks, Paul, for having us. I would say GoPro is a different company from what it was several years ago. The combination of much better hardware product, the innovation we put in our cameras, hyper smooth and our image quality and the use cases for the product really stand out. And on top of that, we have a really quickly growing subscription business that is really the financial engine of the company. I know we'll get into that in some of the Q&A. But it's driving, it grew 85% year-over-year in Q1. It's earnings 70 to 80 points of margin. It's our fastest growing product that we've got. And it's really driving -- helping to drive margins from what used to be low 30s, now into the 40s. So we were 42% in Q1, couple that with tightly controlled OpEx and really we're a much more disciplined company as it relates to product, hardware, software, subscription, how we manage our OpEx and, ultimately, profitability. And you're right, in 2021, we're about 15% EBITDA to revenue margin. Cash flow was about -- well, EBITDA was about $170 million in 2021. We expect $180 million to $190 million of EBITDA this year in 2022. If we kind of hit the numbers that we outlined on our conference call. So much more profitable company than we've been in the past few years. So...

Great. Yes. So let's jump in more detail on the subscription service. So this pricing side, the one key print was kind of the higher retail attach rate for the subscription service. So -- which is quite positive. So what happened there? And where does this kind of shift out longer term?

Yes. Just maybe for the audience, we have a bundle that we offer on gopro.com. So if you buy a camera, you most -- like 95% of the time, the consumer is taking a subscription, which is great. And then in retail, so someone buys a camera at retail, they go home, they attach it to the app, the GoPro app. And at that point, we ping them in app and say, oh, we have the subscription. And the subscription attach for retail on that process has gone from 8% 2 years ago, to -- it was 25%, I think, in Q4 of 2021. And it grew to 39% in -- attach in Q1 of 2022. And that was more than double what it was in Q1 of 2020. So that attach rate has definitely increased to the point where a -- about 40% to 45% of the business or attach at retail, we're seeing in absolute numbers, almost the same number of subscribers coming in from retail as we do dot-com because about 1/3 of what we sell is on gopro.com, mostly on the high end and on the flagship. And that attaches at 95% and the other 2/3 are attaching it about 40%. And we expect it to be kind of mid-30s over the year, but still, that's driving substantial growth in subscription. So we're very happy about that. A few things we did to help drive it is we adjusted some of the pricing along the way in the App Store, which really made it pretty sticky. And if you look at kind of what we're doing in subscription, the music, the editing features, the content that people can put in the cloud. As we look at it, about 72%, and we reported this in our conference call 72% of all subscribers have content in the cloud, and that content grew about 40% on a year-over-year basis. So they're using it. They're putting content in the cloud, and that storage is growing, and that's great. It's being used.

Great. So you ended the year with over 1.7 million in subs, end of 2021, you kind of expect to reach 2.2 million by the end of the year, that's up 40%. So what's driving the confidence there? You talked about higher attach rates, but if you could expand on that.

Yes. I think we ended 2021 with, I think, 1.56 -- close to 1.6 million subs. We ended Q1 at 1.74 million. It's continuing to grow nicely in Q2. And -- yes, and as we look at -- because of the attach rate, and we kind of know the math. So a lot of it's really tagged to units, and we expect units to grow in the year to about 3.2 million, maybe a little bit more units for 2022. And that combination, what I talked about, of 95% attached is very consistent attach on gopro.com and increasing attach that we're seeing year-over-year. And retail is really driving us to the $2.2 million, which, to your point, is up 40% or will be if we hit it by the end of 2022.

Cool. And then what features of the offering, do you believe are kind of the most compelling for subs and kind of keep that sticky base there.

That's a lot of things, right? The offer is you get discounts on -- it's a financial play to start, right, because you get a discount on the camera, you get future discounts on accessories up to 50% off, you can get $100 off on your next camera, storage in the cloud, unlimited storage, actually have the original content, you filmed in that, right? So we don't down res the content. And if you break it, there's an insurance aspect. So if you break it, we'll replace it, you have to pay $100 for a $400 camera, but we'll do that. They don't break very much. So we don't replace that many. That's why it's a very high margin. So all that, I think, the combination of all the services we do. And there'll be more as we look ahead from an editing perspective that from a workflow, it will just make it easier to use. And so that keeps people in. I think it's also worth pointing out, we kind of have 2 cohorts. The group that comes and buys on gopro.com with the subscription and the bundle and then through retail. And we actually see the 2 cohorts over the last day that I've seen says they behave pretty similar to one another. Retention rates are basically the same between the 2 sting in the program, how much content goes up to the cloud, how much content pulls down to their phone to edit, the numbers of people who actually have content in the cloud, 72%. They're very similar, almost at the point of being statistically you can't even tell the difference between the two. So we're very happy about that. And it just shows you that what we're providing has real value. And the other thing, I guess, I'll point out, and we mentioned this on the call, most of what we sell, about 90% on gopro.com is flagship that would be currently our HERO10 Black product. And the actual attach in retail is proportionate by camera. So in terms of new subscribers, people who own HERO8, HERO9 HERO10, our MAX product, they're all coming in with subscription proportional to what we sell in retail. So that shows you there's real value there to the consumers, it's not just on the bundle.

Got you. And then can you talk about churn rates. Where are they? Do you ever see customers that have canceled, kind of come back. How is that first cohort that lap the first year subscription and how that panned out?

Yes. The 2 cohorts, and I think I mentioned this, pretty much behave similarly. Retention rates, we don't give out the number, but we're very happy with it.

I must try.

You can try. But -- good of you to ask. But we're very happy with kind of what that retention is. And we do have people go out, but then we ping them and we need to have CRM campaigns to pull them back, and we do get people coming back. So which is good, and that's all factored into kind of our retention. And the 2 cohorts, as I said, the last day that I've seen, they're basically ousting, retaining at about the same rate. So -- which we're very pleased with.

So you mentioned switching to annual upfront from monthly kind of increases the stickiness, expand on that progress there, kind of the rationale and kind of impact on cash flow and all that good stuff.

Yes. Actually, we've done, I think, a number of things on gopro.com, we used to offer some free trial periods. We stopped doing that. We went straight to paid. A big chunk of what we had as subscribers were monthly, and that has a much higher churn rate than annual. And so we've shifted where most of the subscribers now are annual, which is great. So the retention rate is much better there. So pretty pleased with how that's going. And they have an opportunity to stay in longer, get their content up in the cloud, which we've seen is growing, is up 40% year-over-year in terms of content, average content per user. So it's definitely being used.

Okay. And then let's just recap on Q2 guide. Units were a bit light, but ASPs were quite strong. So what's going on in Q2 and kind of timing of sales.

Yes. We talked about that a bit on the call. In Q2 of 2020, we sold in a lot of, what I'd say, low-end product, our HERO7 White, which is very low end and silver products. So that was amounted to close to 100,000 units in Q2 of 2021. We don't have those units to sell in Q2 of 2022. And to your point, so we'll be down in units for sure. But ASPs move from $345 to almost $400, right? And so we've almost shifted what we lost in units, was made up about 14%, 15% in ASP. So -- but that ASP puts us up into the 40s in margin, whereas we were in the 30s last year. So this isn't about tonnage. This is about how do I make money. That's why I was saying it's a different company from the stock.

It's very profitable, right?

It's how to drive profitability, how to give the customer the best experience and continue to drive innovation, build a moat that's competitive and makes it tough for people to compete with GoPro. And as long as the consumer is getting the best experience, we offer them great software, services, web subscription and the ability to make great edits, whether it be single clip or multi-clip edits. The customer experience is what's driving the profitability of this company. And that user experience and innovation is key for us to get back to the 15% EBITDA margin.

Right. So how is the current channel today? Are you comfortable with the inventory levels as we sit now?

Yes. As I look at channel inventory, we've reduced it about 50,000 units to about 600,000 at Q1. We expect it to come down a little bit in -- further in Q2. So our sell-in will be a little bit less than sell-through. And I should say, in Q2, as I mentioned, I think, a week or so ago, we're pretty pleased with our channel sales and expect to sell through about 675,000 units this quarter. So far, that's on track, and it's on track globally, from U.S., Europe is doing well and Asia. So we're pretty pleased with how sell-through is going so far. And as I look ahead to the year, we would expect -- so take channel inventories down in Q2, so first half, and it will come back to about the 650,000 unit level in -- by the end of 2022. So we expect to sell more product in the second half. And that's really being driven by the fact that we'll have a new flagship product out and another new product that we'll introduce in the second half. So it's all driven by having more products to sell and we'll be able to fill the channel as well as some more on gopro.com.

Got you. And then just a follow-up on the revenue for the full year, what could possibly drive some upside there, whether it's increase in travel, more pricing, et cetera?

Yes, if there's upside, we did not factor in any lift really from international travel. So if international travel comes back, that's a tailwind for GoPro. And that means we'll be selling more in region, more through gopro.com, Best Buy, Target, Walmart, Amazon, et cetera, as well as duty-free, cruise. So we're not selling into duty-free and cruise today, we haven't sold in there in 2 years. So as that comes back, that's a tailwind for GoPro. So hopefully, it does.

Okay. So can you give us a sense of kind of macro? Any impact from the China shutdowns in your business? And then I guess, the state of the consumer, how you're -- where you see the consumer in terms of sentiment from your seat in both North America and Europe? .

Yes. Supply chain, we've done a terrific job, kind of forecasting our business between our demand planning team and our operations team and getting into supply chain. We had plenty of product in 2021. Sales were full for Christmas, which is great. We're one of the few, I think, CE companies that had product on shelf, consistently. That was true also in Q1 of '22. We expect that in Q2 of 2022. And now we're working on the second half. So pretty pleased with that and how that's going, and we're getting great support from our partners, too, right, from the supply chain. So thank you for all who are supporting us because the consumer wants the product. The current lockdowns in China and Beijing and Shanghai really haven't affected us because most of our production is in Southern China, and that's open. And so we're still building product and products going across the border and being shipped around the world. So that hasn't affected us. Obviously, it's affected in-demand a bit in China. It's one of our top 5 countries, typically, but that's been factored into our guidance, right? So you -- and this is actually more resilient than I would have thought, actually, given the lockdown. So there's big cities in China and now all of them are shut down and they're still buying GoPros. So that's great. We're seeing good end demand in Europe that's kind of counter to what I've heard a lot of my counterparts say about demand, particularly in CE in Europe, but we seem to be doing well there. Asia has picked up, [ time ] is a little bit off. Japan starting to come back because it's been kind of in and out of lockdowns. We're seeing Southeast Asia pick up, Thailand and Korea, pickup. Australia has been kind of moving along as they're out of their lockdowns. North America was a little bit light in March. I think a lot of people reported on that, we saw it too. We're seeing North America start to come back, which is good. And that's -- otherwise, we don't get to the 675,000 unit sell-through. So it does need to come back. And so far, we're seeing that.

Okay. Great. And then I guess on the component side, are you seeing kind of cost inflation? I know you kind of proactively manage that supply and your inventory to kind of get ahead of that. But any comment there?

Yes. There's definitely been some component cost increases, some in 2020, some '21, some in '22. Those components cost increases have been factored into kind of how we've guided margins. It was included in the 42% last quarter, and I think we guided 40.5% or so in Q2. So as we look out, we've got that factored into between our pricing models and our cost models.

Okay. I guess, segue into margins. So you -- we've already kind of touched on this, but talk about how you got from the low 40s -- or low 30s to where you are today and then kind of post some of these temporary costs that are hitting, the margin line like freight, supply and FX, where do you think gross margins can go near term and then longer term?

Yes. So back a few years ago when we were down in the low 30s, we didn't have much of a subscription business. That's pretty nascent. We were selling kind of good, better, best and the best was great, good margin. The good and better, not so good. And it really wasn't the right experience for the consumer. And so as we kind of looked at it, really, if you go back to 2018, I think our ASP, what we call street ASP, taking our revenue divided by the units we sell, was about $260, $265. And last quarter was, what, $414, I think. so up substantially. I think you CAGR on that, it's like up 13% or in that range. So we've definitely been able to increase ASPs. And like I said, it's not about tonnage, it's about making money. So we've shifted really to the high end. To put that into perspective, or what I mean by the high end, is if go back to 2018, the number of products we were selling that was above $400 MSRP was probably less than half of what we were selling, way less than half. Q1, it was more than 90% of what we sold, was $400 and above. And that was up from a year ago where I think we were at 79%. So we've definitely been shifting the market up in ASP. And so that got our hardware margins up into the high 30s. And then we sell a lot of accessories, that's better than corporate average margin. And then we sell the subscription, which I call the financial engine and now that's up to -- it was nearly $20 million last quarter. And it's making 70 to 75 -- 70 to 80 points of margin. Well, so subscription for this year will be in 2022 in the -- better than $80 million. So that's about 7% of what we'll sell, but it's going to generate somewhere around 30% or so of our total profitability. So that gives you a sense for -- that's why I call it the financial engine, when 7% is generating 30% of your profit, and we're going to continue to grow that over time. Well, that's going to continue to help our margin profile. And I said on the call, as we look out a couple of years, with that growth in subscription and the -- as being the profit engine, we could see margins expand even into the mid-40s, right? So that definitely has -- affords us the opportunity to grow the business and continue to really make the user experience better. And it's all back to consumer, and we've proven that. If the consumer is happy, then the consumer is buying. They're staying in the program, and we make money, and that's good for our shareholders.

Right. Okay. Let's move on to OpEx. So are you pretty comfortable with the kind of current annual run rate of OpEx? Where are you kind of focusing your R&D? Where do you see opportunities for more leverage in the model?

I think we've done a really good job on OpEx. If you went back to 2016, I think we spent $709 million in OpEx, and we've trimmed it down to actually, I think in '20, it was sub $300 million. But our original guidance in February was about $340 million to $350 million, and we actually pulled it down to $340 million to $345 million in the May call. I think we've done a good job prioritizing OpEx, being disciplined there in what we spend. We will grow in R&D. In R&D, we'll continue to drive innovation like we've done with HyperSmooth. We will do more in software. So we're hiring a lot more software engineers, web development, to make that experience better. As we look to the second half, we'll do some things that are just kind of basic and simple, but will make a difference in the user experience. So today, if you want to make an edit all your content, it goes from your GoPro, it will go from cameras to a hub. When you go in and plug it in to charge all of your content will go up to the cloud. So that's cool. And when you want to make an edit, you got to pull that content back down to your phone. Okay. That's work. And then once you do your edit, then it has to go back up to the cloud. So by the second half, you put your content up in the cloud. We're going to give you an edit. We can do that, right? So you go to the fridge, get something to drink, come back, boom, you've got on your phone and add it from GoPro that you can either take or -- and share it, or I like it, but I want to make these adjustments and then now I'll share it. if you want to do your own edit, you can add it in the cloud. You don't have to do the workflow of pulling it down to your phone and then pushing it back. It's all done in the cloud, right, in original content that you shot it in. So to use -- would just make the user experience easier and -- because people love the GoPros, they love to engage in it, love to take the video, love to take the stills, and we offer perspectives and image quality that no one else can. And we're going to see much more activity on -- I think, on the sharing and enablement side.

Got you. So let's talk about cash flow. So it really turned positively in 2020 onset of the acceleration in subscription. But talk about the puts and takes and how we got here and how that cash flow trends near term and longer term?

Yes. Actually, cash flow really turned starting in the third quarter of 2020. In the second half, we generated significant cash flow even then. And then I think there was about $170 million of EBITDA, really drove cash flow, plus some working capital management. So we ended with -- nicely with 2021. We think we'll exit 2022 with about $450 million to $480 million in the bank, and that's after repaying $125 million of debt, which we did in April of this year. So cash flow is good. We expect to end Q2 with $330 million in cash. And so that's after paying back the notes of $125 million. So that says we'll generate cash in Q2. And that's also after we do some share buybacks, which we did a bit when we were in the market last week. So very happy with that and how cash goes. And that's pretty typical. We're a seasonal business. So first half does well, but the second half does better because of the holiday. And that's what really drives most of our cash flow, and operating profit is in the second half.

Right. So let's talk about that share buyback. This is somewhat new. I don't think you've ever done it before. So you're in a much better financial position today. You've got plenty of cash. So how do we think about the kind of cadence of share buybacks here.

Yes. Actually, we did share buybacks back in 2015 and early '16 and had to stop. But now, yes, the Board authorized $100 million of share buybacks. We bought back $10 million in Q1. We bought back about $10 million so far in Q2 and perhaps more in Q2 at these prices. So we've definitely been in the market in buying, I think, most of -- we'll play this out kind of like the cash goes. First half, we tend to be cash neutral, we'll still be buying stock. Second half is where we make our money, so we'll spend more in the second half on buybacks, I would expect. We have the ability, as I look ahead into '23, '24 to expand further as we run the model. And if we can get units up, subscription stays, disciplined OpEx, generates profitability, and again, strong cash flows, we can definitely be in the market buying back stock.

Got you. Let's just talk on your cap structure, your debt intentions. Are you comfortable with the little leverage in the model?

Totally. We've actually paid down debt. So now we're -- we have $145 million in notes due November 2025. So given the kind of cash generation we're seeing in the business, that's really not that bad a leverage.

Okay. So some other kind of questions. So desktop application, what's been the feedback there. I think you mentioned next year is going to be more monetization there, but what's going on with the desktop application.

Yes. We're working on updating the desktop application. We used to have a player back in the day. And we kind of let it go because we did more mobile editing. But we had about 1 million or so consumers who were editing on desktop. And there's still a lot of people who want to use desktop and they can use our ReelSteady Go product today to enhance video stabilization and do editing beyond what we do in -- with HyperSmooth on just your GoPro. So enhanced stabilization is really key. It's used quite a bit in aerial. We came out with the Bones product just recently in Q2 and ReelSteady GO accompanies that. And we made that product specifically for us to be on smaller lightweight drones, and we really skinny down the product. specifically for that market, and it was really a market need, a market like needed a GoPro because for that market, they want image quality and want to be able to follow terrain, go into tight spaces and we give them that ability with Bones. So...

Yes. What was the other kind of purpose-driven camera you also released? And then where -- what other kind of tangential verticals are you thinking about?

Yes. We said we would release 2 products. We're actually doing 3 because we did the creator addition as well. There's another camera, new camera coming out in the fall in addition to our flagship product. So you've to stay tuned for that. But I don't want to get into what it is, but I can say we've done a lot of consumer research. I think that's the other thing that's different about GoPro today is we use consumer research to figure out, okay, what do consumers need? What do they want? What can we do in software, how are they going to use it? What are the features and benefits? And we tailor our products that way. The one that's coming is no different, a lot based on consumer research, but some of it is based on some products we put out in the market before. So we have very good consumer insights into what that product is going to be. And I think the other thing to clear up because maybe it's a misconception, the bulk of what we'll sell in the second half is going to be on the new flagship followed by probably our current flagship probably followed by maybe the newer product. So it's not like we're like totally dependent on this newer product to be a massive success. It's going to do well because we've got the research on it. But the whole kind of company is not hinged on it. Kind of like I think there was a little bit of overreaction as we were moving some units, about 80,000 units from Q2 to Q4. And people obviously, there was some stock movement as a result. But it's like, no, we know what we need to sell in Q2. We know what end demand has been and should be, and it seems like we're tracking to it. And we knew we have more products coming in the second half, and we've got very good consumer research on how we think that's going to do. So we're pretty excited about that.

So we got an inbound question.

Can I ask a question on the competitive side. With regard to your main competitor, and I have a son who has a lot of your products and like -- I'll do follow-up after you answer. Yes.

Yes. From a competitive position, a lot of companies have come in and tried to compete and really haven't been able to just because of the kind of products we put out. We have exceptionally high market share, and that's globally. So there are some companies that put products out, but it's very low share. And so we tend to have very high market share.

Would you regard DJI as a competitor?

They are. Yes. They come out with products. But again, if you kind of look at the market share splits, we're way over lead. They clearly lead in drones, right? That's kind of there -- where they came from. But we definitely kind of have the book in the market.

Okay. We're out of time. But if Brian, if you want to close with kind of what's the most underappreciated part of the story for GoPro and then call it a wrap.

Yes. I think the most underappreciated piece is -- it's a different company. And from where we've been, it's not about tonnage, it's about how to make money. I think we've proven how to make money. And in this model, we can drive a lot of profitability and cash flow. And it's about how to make money, how to drive cash flow and how to reward shareholders for it and build the best products for the consumer because that's what ultimately rewards a shareholder, too.

Great. Thank you so much.

Thank you.